ReSolve Riffs with Wes Gray and Patrick Cleary at Alpha Architect about Launching a Bitcoin Futures ETF

Wes, Patrick and the Alpha Architect Team are long-time friends of ReSolve, and were gracious enough to join us last-minute to discuss their huge win in the ETF white label space, with the launch of the ARK 21Shares Bitcoin ETF. Wes and team are known for their pure factor ETFs, but in the last few years they’ve pivoted from asset management to create an ETF Architect division, offering the “picks and shovels” for external managers to offer niche strategies with tight operations and low costs.

Wes and Patrick give us the straight goods on what it takes to launch a successful ETF, including:

  • Overcoming their academic focus on factor-oriented quant strategies to entertain more diverse offerings
  • How “ETF Innovation” differs from traditional approaches and fund conversions
  • The “minimum effective dose” of operating capital and market buy-in necessary to facilitate a successful ETF launch
  • A deep dive into the levers of economics and margins for launching and operating an ETF
  • Insights on changes to tax and regulatory rules proposed by the Biden administration, and the economic merits of equalizing ETF and mutual fund tax treatment
  • Evolution in market access – how investors access ETFs vs mutual funds and how to get shelf space for fund products
  • The special considerations involved in launching a Bitcoin ETF
  • Overcoming the negative roll yield typical of Bitcoin futures
  • The state of arbitrage in the digital asset space, and why juicy returns will probably persist

You will not find a more candid, competent and credible team than Wes and Patrick to get the unfiltered version of what you need to deliver a successful ETF launch. It was also amazing to learn more about the machinations involved in standing up a crypto asset product, and getting a glimpse into the future of the space.

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

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

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Patrick Cleary
CEO, ETF Architect

Mr. Cleary is currently the Chief Executive Officer of ETF Architect, where he oversees firm operations, compliance, and cybersecurity. Previously, Mr. Cleary served as Director of Strategy and Corporate Development for Algeco Scotsman, a multinational leasing and manufacturing company. Before Algeco Scotsman, he was a Project Leader for the Boston Consulting Group. In that capacity, he advised clients across a variety of industries in the US, Europe, and Africa. Mr. Cleary also served as a Captain in the United States Marine Corps. He holds an M.B.A. from Harvard Business School and a B.S. in Economics from The Wharton School of the University of Pennsylvania.

Wes Gray, PhD
CEO, Alpha Architect

After serving as a Captain in the United States Marine Corps, Dr. Gray earned an MBA and a PhD in finance from the University of Chicago where he studied under Nobel Prize Winner Eugene Fama. Next, Wes took an academic job in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management firm dedicated to an impact mission of empowering investors through education. He is a contributor to multiple industry publications and regularly speaks to professional investor groups across the country. Wes has published multiple academic papers and four books, including Embedded (Naval Institute Press, 2009), Quantitative Value (Wiley, 2012), DIY Financial Advisor (Wiley, 2015), and Quantitative Momentum (Wiley, 2016). Dr. Gray currently resides in the suburbs of Philadelphia with his wife and three children.


Mike:00:00:58Happy Friday, Wes.

Rodrigo:00:00:59All right. Happy Friday. Welcome, Wes. Cheers.

Wes:00:01:03Thank you for having me.


Rodrigo:00:01:00It’s been about a year.

Wes:00:01:05Beers up on Friday.

Mike:00:01:07Yeah. Cheers, man. I got a little Light Sky. It’s like a citrus wheat beer, low carb.

Wes:00:01:14Yeah, I know. We’re all trying to keep our girlish figures intact. None of us are drinking real beer.

Mike:00:01:21Well, I see you with a Corona. Is it Corona light?

Wes:00:01:25Yeah, yeah, yeah. The Corona is too strong for me too, man. I’m dying here. I actually got another call at 05:00 for official business, so I can’t be actually drinking too much.

Mike:00:01:37Oh, yeah. No, no. Just the right amount. You wanna just drink the right amount.

Rodrigo:00:01:40Yeah, you want to just loosen up.

Mike:00:01:42Yeah. And just to remind everybody who happened to tune into these three scallywags talking on a Friday afternoon, none of what we’re going to talk about is investment advice. Or in any way nature factual. It is entirely entertainment. So, there you go. And with that, we’re going to talk about lots of different stuff. Who knows?

Rodrigo:00:02:02Yeah. Just a few things. Wes, thank you for coming last minute. We had a last minute cancellation. You and Patrick and your team were trying really hard to get everybody on. I think Patrick’s going to join us, hopefully, in the next 15-20 minutes.

Wes:00:02:15Yeah, yeah. He’ll be here. He’s in the middle of doing some last minute work, but he’ll be on probably 15-20, I imagine.

Rodrigo:00:02:22Awesome. And I know you guys are working on big, big deals that we were hoping to talk about in detail on this podcast, but not yet. We have to wait for some regulatory approvals before we get into the details. But that is already hooked up for podcast, hopefully in the next week or so. So, we’ll focus on everything else. Your core business. I am actually dying to get a brief history of Alpha Architect and Wes Gray. Because I was talking to my wife today of the first time we spoke, and it was when I joined Mike and Adam like 2011, and we’re all starting this business together. Like, we actually grew up together in this space, right?

Wes:00:03:03Yeah. I remember. You guys were hawking or not hawking, sorry, educating one of our longtime clients about — and he’s like, “Man, you kind of get on this phone call and listen to these guys. They’re talking about mean variance analysis, efficient frontiers.” And at the time I was a prof. That’s what I used to teach all day. You guys were good, man. I was like, yeah, they know what they’re talking about.

Rodrigo:00:03:28I’ll tell you one thing that came out of that call that we have adopted at ReSolve is, as we were walking you through what we walked your client through at the time, you kept saying, “Yep, yep. I’m tracking. I’m tracking.” That lives on, on a weekly basis at ReSolve. Huh-uh, huh-uh, I’m tracking. I’m tracking. Such a military man. Love it.

Wes:00:03:51Yeah, that’s true. I think that’s a marine, marine-ism thing. I’m tracking. I’m tracking on that. It’s definitely something they say in the service, as a …


Rodrigo:00:04:01So, let’s go. Let’s start with like, tell me a little bit about memory lane because I want to go from the beginning. You actually left academia to start something and you guys have, what I’ve always found really interesting over the years is you constantly reach out to us to try new things. Hey, what do you think of this? Let’s do like a win-win. Why don’t we try this other thing? Like, you’ve done a bunch of pivots, like the definition of a VC. And I feel like you’ve finally hit on something that’s really working for you. And so why don’t you give us a little bit of that history and that background? It’s really, really interesting.

Wes:00:04:34Yeah. Well, yeah, you guys taught me about trend following, and we just kind of adopted that in our business, is the easiest way to put it. So, we’re going way back to the beginning. How did this popsicle stand start? Well, I literally was doing what you guys do, writing a blog and got cold call by a billionaire who said, “Hey, I’m firing all these hedge fund people, it’s after 08. I read your blog, I read your dissertation. Can we talk?” You know? I said, “Sure we could talk.” So, that was 2010. And then that was also right when I was starting up as a professor. So, as I was literally on the professor market, I’m getting like, starting a business essentially at the same time. But you never know where the business is going. So, I was like, I’ll be a prof officially. That was 2010.

And then we spent two years just pure research, really. We were just really working on behalf of the family to make sure what was there getting pitched, what we’re doing, etc. In 2012, we got seeded, SMAs. And it was all like you guys, inbound marketing, random, rich person reached out, read a book, they’re like, “Hey, this is cool. How do I do that?” And that’s just because that’s all we knew how to do.

And then 2013 came around. One of our clients had a big tax issue related to a single stock position that had a super low basis, and that security was going to actually get bought out in a cash merger. And I was always like, the tax guy, like, hey, solve this. Figure it out. I was like, well, that’s kind of a hard one, man. Like, you have a $2 million position, it’s worth 80 and there’s a cash buyout announcement coming. Like, what am I going to do? But you know, the rich person says jump, you say how high, which is what I did.

And then I was at a conference and I learned about you can’t do this transaction… could probably never do it. But through a conversation, I learned about ETFs. And I learned about this whole thing of in-kind custom crates, and you could put a security in a fund. And then you could kick it out without having to — and I was like, holy cow. This is a tax deferral vehicle, we need to get in this business. And again, that was around 2013. But we were broke, didn’t have anything, and then we obviously talked to some lawyers as you guys probably have and like, oh, yeah, set up an ETF. Like. you don’t just do that.

And so we end up raising some capital from one of our clients, who’s now one of our business partners as well. And then we got into the ETF business because of the taxes, right. So, we transitioned back and then SMA’d ETFs.

Rodrigo:00:07:21Because I remember we were also at the time you and I were talking about the international insurance companies and using that as a vehicle to try to transition the situation.

Wes:00:07:32Yeah, that was another way to do it with like, private placement life insurance, private placement variable annuities. And those are also awesome. And we think those are good structures, but the ETF was just – it was just better for our purposes. We thought that’s where the business was going because we’re doing factors, right, active factors. So, then we got in that business and that was, as you guys know, a long slog. I don’t even know, like eight years now.

And over time, we still have our legacy SMA business, then we moved into like our ETF business. And, I don’t know, it’s probably two and a half years ago now. Everyone knows Perth. Perth had reached out because we always had people ask us like, hey, can you just let us use your infrastructure because we don’t want to burn millions of dollars on fire. We’re like, no, we don’t want to deal with other people.

Mike:00:08:29Yeah, no, no, we were one of the no’s.

Wes:00:08:31Yeah, yeah, yeah. It was a lot of people. Yeah, it was just …

Mike:00:08:34We were one of the no’s. We went somewhere and did it, and you said, what’d you do that for?

Wes:00:08:39Yeah, yeah. Tons of brain damage. But Perth is very persuasive, and persistent. And long story short, but she got all the things that we needed to do it. And we’re like, you know what, let’s try it. So, we did that, what, two and a half years ago. And then it turned out we’re just idiots, because one of the benefits of surviving in the terror dome here for the last seven-eight years, is we were able to vertically integrate, build every little component of the ecosystem, know where all the bodies are buried and survive. We have extremely low cost infrastructure and capability that a lot of people don’t.

Well, I don’t know why we were keeping that as a cost center because we can turn that into a revenue center and we’re actually a lot better frankly at ops, checklist, getting shit done, than we are obviously at selling ETFs, because we don’t have billions of dollars in our ETFs. So, then we’re like, you know what, we should be shovel salesmen. Why are we being gold miners?

Mike:00:09:38Yeah, fixing shovels baby.

Wes:00:09:41Yeah, we’re not that great at gold mining, frankly. Our products are too crazy, and it’s just, whatever. And then we’ve just been lucky because we had that unique ability, like low cost access, and that’s just what we do. And then we’re just hitting this time where like, everyone on the planet needs to get into the ETF wrapper, right. And that’s just good luck. So, started with Perth, but now it’s like RIAs want to transition, mutual funds want to transition, hedge funds want to transition. Everyone on the planet wants to launch an ETF.

And as you guys know, iShares isn’t going to launch your ETF. Vanguard’s not going to launch your ETF. And the number of people who actually have vertically integrated capability across the stack to run and operate an ETF, I can count them on one hand. And we all have different value propositions and they’re all great, and I love my competitors. And so that’s what we do now. It’s called ETF Architect. I don’t know what the next adventure will hold, but …

Rodrigo:00:10:45I see. That’s a great journey.

Mike:00:10:46I see what you did there.


Rodrigo:00:10:52I mean, it’s so difficult to — I remember we tried to launch an ETF before we took another path. And we did go through the whole process, spent the $50,000 on legal, had the prospectus launched, we were ready to pull the trigger, we sent the trading blotter and they’re like, oh, you can’t trade those things. It was one of those like, what? How can we — we just spent all this money and all this time? Well, you’re not allowed to because … that probably should have been addressed with legal in the first couple of weeks. You know what I mean?

It was a wild, wild west back then. I think there was less integration with the partner that we chose at the time. But it is a wild jungle full of pitfalls, right? And depending on what you’re trading, where you’re trading, it becomes — you need somebody with expertise in that type of vertical integration that you guys have definitely built.

The ETF Architect Process

Mike:00:11:49Well, that brings up a big question. I mean, maybe it’s too early for this question. But I mean, there’s a lot of different types of ETFs. And a lot of different nuances between what the underlying purchases will be. We’ve had lots of experience in that in Canada with commodities, certainly, things like the DBO. And the US have gone through several iterations of how they approach that versus sort of your sort of classic, hey, I want to buy 25 stocks or 50 stocks. Here’s my basket. I guess the ETF landscape has gone through that arc of development from first ETFs with stocks, then some ETNs, getting into the commodity space, and then the active ETFs with Cathie Wood. So, there’s been this kind of progression that we’ve seen. But how is ETF Architect sort of thought through that process? And what’s the landscape look like for that business as the complexity of the product expands?

Wes:00:12:49Yeah. So, I mean, we always try — We don’t have interest in putting people in the ETF wrapper just because we can sell them a shovel. Because in the end, when you run a platform, you’re like getting married, and everyone’s in the same boat, and we’re in the long game. And so we’re not going to put someone on our platform in the short run, just because they say they want to pay for it, even though we’re like, well, why would you do that? ETF’s not the right wrapper. You should do that in a mutual fund or hedge fund. So, a lot of the times on our platform specifically, we will tell them, no, you shouldn’t do that. You shouldn’t do micro caps because guess what? Susquehanna will fleece you and you will die. You want to do managed futures. Well, you shouldn’t do that, either because you can’t use the leverage. And it’s totally constrained. And it’s —

Rodrigo:00:13:37I think that was your no to us. Yeah.

Wes:00:13:39Yeah, exactly. Like, we’re not going to have someone get into the ETF wrapper, just because they think it’s a good idea, if it’s not appropriate for the strategy, right? And so we always try to coach people on that as much as possible. And that’s just because we’re always trying to think about like, hey, you use the ETF to basically maximize the tax benefit, the transparency and the access to, you know, anyone with a Schwab account can type a ticker in. But we’ve learned over time, more and more on ETF Architect, Wes can’t be a judge anymore, because there’s something for everyone. So, if I don’t like the product, fine.

Our criteria is, can you pay the bill — Yeah, yeah. It’s can you pay the bills? Will you raise money and be in this for a long time? And will you not blow us up on compliance? Even if I think your product’s crazy, and I want to invest with my own money, it’s just, that’s not our business. We shouldn’t be in a position to judge product because we’re just trying to give access to the market efficiently. And so that’s our new take on it. Which means that if you come to us with a unique innovative idea, and you have the story of how you’re going to distribute this thing, and you’re willing to pay the cost that it might take for us to be able to do some weird triple leveraged Zimbabwe swap or whatever it is, we’ll make it happen. It’s a service business, not a judgment business. And so that’s what we focus on now.

Mike:00:15:16Well, it’s morally presumptuous if you start getting into the judgment business.

Wes:00:15:19Exactly, exactly. But it is on us to make sure that if you’re on the platform, can you pay the bills? Can you raise the capital, because we don’t, we’ve got 100%, in the sense that every product we launch, we generally never want to have to close a product. And we haven’t, and we’ve obviously been in a huge bull market, so I’m not saying it’s been hard. But I really do want people on our platform, like, we want to be a team and I want them to be in business for 20 years. So, there is that requirement, because that’s good for shareholders, if we kind of pre-vet people on the thing. And it doesn’t really matter if Wes only wants to buy quant factor stuff.

You want to be a stock picker? Great. Let’s do it. There’s some great stock pickers out there. So, we’ve got to all change your mentality of the — like, our mission on investment size and power to education, our mission on ETF Architect side is help ETF sponsors win, period. So, we don’t really care what your strategy is. We’re just going to help you win and achieve your goals in whatever endeavor, process, strategy that you want to pursue, basically.

Mike:00:16:37I imagine this comes with a lot more niche-y products, and sort of what we’d call the explore products of the ETF universe. And how at liberty are you to talk about some of the products that you currently have in the lineup? We’re okay with some of those? And I don’t know, I think I know, like Riggs, for example, right. And that’s a really interesting, very unique niche-y ETF that I think is fantastic. But is that what you find yourself seeing, more of those kinds of things?

Wes:00:17:14We kind of have two buckets. We have what they call an ETF innovation bucket. And then we have like, traditional bucket, and I’ll explain. So, ETF innovation is, you’re coming to market as an unknown. You don’t have a billion dollars, you don’t have an advisor that’s already got a bunch of money. You’re not going to do the bring your own asset thing. And I’ll talk about those in a second. And so an ETF innovation, from a platform standpoint, it’s really important that you have a value proposition. And so if you’re going to come to market and say, hey, I’m going to set up my smart beta value ETF. We’re like, all right. Roger that. Go talk to Title, or go talk to someone else. We’re not interested.

But if you’re coming to us, and we see every deal right now, and you’ve got something really unique, something cool, and I’m like, that’s a great pitch, and you’re the person that should be telling that pitch, because you have the right expertise. Even though I may not know anything about that specific field, you’re clearly the author of this book. And if you have the capital and the backing, and we feel like you have staying power for like three to five years, even if you don’t have like $100 million seed, we want to help you out, right? Because just like you guys, when you’ve been an entrepreneur and you’ve been broke for 10 years, like you just have empathy for people that are trying to get into the business, and you want to help them out.

So, we love boutiques and ETF innovation, and you’ll notice all the funds on our platform and those that will be coming to market. You know, more and more, they’re going to be funded by some people in our syndicate like on the operating capital. They’re doing cool, unique things, but they’re not coming to market with the 100 million dollars. That’s ETF innovation. On the other side, is the bring your own assets. Hey, ETF is better for my clients, it’s more tax efficient, and it’s operationally 10 times more efficient. I have 500 SMAs, it’s a huge pain to try to manage them all. I could just put them in one ticker, and the fees are tax deductible, and I don’t have to pay the… I don’t have to shoe capital gains. Those are totally different, and that’s usually RAAs.

And then right now, as you can imagine, there’s a ton of mutual fund conversions because they’re like, hey, I’m in this mutual fund that has capital gains, and it’s a pain, I could convert to an ETF and compete again. So, those deals we’re seeing a lot more of. And they’re not as exciting, obviously, because innovation is like the shiny rock. But they’re obviously, from a business standpoint, pretty intriguing because there’s a lot less risk. Oh, you want to launch a $500 million fund day one? Roger that. We’re here. Yeah, yeah. And that’s obviously what a lot of the product that we’re bringing to market here in the future you’re going to see is funds that are — these are pros. Like these funds, will be around for a long time.

Rodrigo:00:20:13Is this why Pat is blowing us off right now?

Wes:00:20:18What’s that?

Rodrigo:00:20:19Is that why Pat’s off right now?

Wes:00:20:20Yeah, exactly. That is literally, we are right now in the middle of welcome to the service business. Customer says jump, you say how high. That is the reason why Patrick Cleary is not here right now is because on a Friday late afternoon, we’re helping out our teammates to try to get to this ETF market. You got it.

Mike:00:20:40So, when do you assign the probability of maybe leveling the playing field, from the legislative perspective? Like, there has been talk that, hey, this is unfair. Mutual funds are lobbying for some sort of leveling of the field, whether that’s hey, let’s make those ETF bastards taxable or not? What are you seeing there?

Wes:00:20:58I am all about leveling the playing field in the sense that mutual funds should be granted the same taxation capability as ETFs. But I am not, I’m very against — well, for two reasons, one, conflict of interest. Like, I like the tax benefits of ETFs for my own personal capital, and that’s our business. But then also, it’s just fairer for consumers, right? Because if I buy an ETF with a massive deferred capital gain, I just bought a tax liability. That’s an externality problem that shouldn’t exist. Where in an ETF basically, it pushes out tax externalities to the client, and the tax decision is on the end consumer. And that’s how it should be, that’s the fair way to do it.

So, I think what they should do is just make sure that to increase competition and make sure it’s fair to the mutual fund vehicle, which is a good vehicle for certain things, it’s just they’re not appropriate for the ETF. They should find a way to make that have the same tax benefits and kind of limit the externality problems that clients in mutual funds face. So, I’m all about fair and balanced competition. It’s good for consumers, for sure.

The Costs Involved

Rodrigo:00:22:11Right. So, can we just kick it back a little bit? Let’s say I’m an ETF, I want to convert into an ETF, or I want to launch an ETF. Let’s talk about the costs, right? So, startup costs, and then ongoing costs, and any sort of variable costs that might come into play. Maybe you can break that down for us.

Wes:00:22:30Yeah. So, it’s real simple at a high-level. To launch a fund you’re basically going to have an IPO. So, as you mentioned, it’s like 50 grand, light money on fire. And it’s a ton of work, right? It’s going to take you anywhere from three months on the ultra-short into six to eight months depending on how complicated it is, and if you’re trying to launch like a Bitcoin fund or something. That could take you 10 years, right? But you’re looking at around 50K plus or minus, depending on complexity. But that’s not really the cost. The real cost is the ongoing operating cost where you literally just light money on fire, big time.

And I always tell people for under 100 million, which I would call sub scale, you’re all in kind of fixed costs. Costs, fixed and variable, everything you could probably deal with, is going to be anywhere from like 225 to 250, is what we got it down to. Over time, we’re going to try to get this down to like 200 on our platform, but that is soup to nuts. I.e. the only other cost you have is whatever you pay yourself to put together the spreadsheet to tell us what stocks and weights you want us to buy. We’re doing everything, right. Let’s say you’re 50 bips, you need 50 mil, basically to break even. Which sucks.

But why do people want to do this business? Well, the marginal cost production, after you’ve paid the fixed cost, is usually around 10 basis points, let’s say. It’s subscale. Maybe you get it down to five or six if you’re multiple billions. So, that means if you charge 50 basis points, you get to 50 mil, okay, you breakeven and just lit money on fire. But now every dollar you get in, it’s an 80% profit margin. That’s a pretty good business, right? So, I always tell people ETFs are really little software businesses in plain sight. And it’s actually perplexing to me that there’s not more VC and traditional kind of software technology type investors because the proforma of an ETF looks like a software company. Big fixed costs, it costs a lot of money to build the first CD, but then — we don’t have CDs anymore, but you guys know what I mean.

Mike:00:24:48They pump out easy after that.

Wes:00:24:50Yeah, yeah. That’s an outmoded thing. But the first CD is really expensive and then the copy of the CD, for anyone who knows what a CD is anymore, costs pennies.

Rodrigo:00:24:59CD to an eight-track and —

Wes:00:25:01Yeah, yeah. I don’t even know — What is the equivalent today? What is the Gen Z equivalent of that? I don’t even know.

Mike:00:25:06There’s no equivalent. It’s all online.

Rodrigo:00:25:10Everything’s online. There’s nothing. It costs nothing to make. What, an NFT cost nothing and it makes millions day one.

Mike:00:25:15I suppose the phone that they hold in their hands. I don’t know.

Wes:00:25:18Yeah, yeah. I guess in their context it’s like, yeah, it costs $50 billion in physics and underlying engineering technology, but the cost production of the supercomputer in your hand is like whatever, 200 bucks, you know. So yeah, they don’t even have the equivalent of what we’re talking about here. But you guys know what I mean. High fixed costs …

Rodrigo:00:25:42You’re talking to the right audience. I think we all know what a CD is. I remember when we first started out, thinking of raising $50 million dollars or being on the hook for $220,000 a year, is a massive proposition — I mean, you literally have to be insane to go from zero if you have no presence if you have no, like you said, no — just saying I have a dream, and I have some savings. How many of like zero, like brand new players do you get in contrast to people that have $100 million.

Wes:00:26:15So, we’ve launched a few and we’re going to launch some more. And basically this is our playbook for like minimum viable product. You know, MVP is what the tech geeks call it. So, we say listen, here’s what you got to do. Day one, you got to show up to our door with 500K in operating capital, because that’s going to give you about three years of breathing room to stay alive in this business, right? Day one also, you guys show up with 5 mil AUM. Talk to your rich uncle, your grandma, I don’t care who it is, but that’s the bare minimum and you better have a damn good value proposition and story about how you can be a brand in the marketplace as a boutique.

And then your year one goal, 25 mil. Year two goal, 50 mil, breakeven, and now you’re off to the races. And Perth is actually a perfect example of this, because that’s basically what she did; 500K operating capital, five mil day one, talk to the rich uncle, your grandma, your buddies, whatever, and then grind it out to get to 25. Like work your niche, work your angle. And then she’s obviously surpassed that because she has $100 million now. But the idea is she is the prototype. Like, if anyone wants to be a boutique in a “no name” in our business, and you want to know a model for success, go talk to Perth Tolle because she did it, literally.

Rodrigo:00:27:51But we’re going to have her on in a couple of weeks.

Wes:00:27:53Yeah, perfect. And there’s a gentleman, what’s the rules on – whatever. I’ll just tell you. I don’t know if he’s going to launch an ETF. But let’s just say some — a buddy of mine, Ray Micheletti, he’s a Princeton PhD, engineer, and you guys probably read some of his stuff. He’s big into relative sentiment indicators, right? He’s kind of on the forefront of understanding where is the timing signal related to how institutions are positioned versus the retail, and he does all this machine learning stuff on like, Centix data, blah, blah, blah. I don’t even understand half the stuff he says. But what I like about it is it’s totally different than trend following, right, which I know, and any other kind of tactical management technique I’ve ever seen. It’s way out in left field, because he basically invented this concept, right? He is the leader on this deal.

And so someone like that is really compelling because he’s got the pedigree. He’s been in the business for a long time. And yeah, he’s not Cliff Asness, but I feel like he’s got such a unique set of ideas. He’s got an ability to put that minimum viable product to the marketplace, that if he has staying power for three to four years, I think he’ll find a market, because it’s just an interesting unique idea I’ve never heard. And I get like you guys, I get pitched something five times a day and I’ve heard it all at this point. And so there’s things like that. There’s cool stuff entrepreneurs are bringing to the market. It’s just it takes time, and it’s hard.


Adam:00:29:31It seems like the economics, like that equation, is sensitive to the fee you’re going to charge too, right? So, how do you guys think through that problem, how to price it?

Wes:00:29:43It’s all about being in the boat together, right? So, most of the time if you’re going to be an ETF innovator, the only way you can do that, i.e. you’re a boutique, you’re not going to be iShares, right? Just is what it is. But the good news is iShares or Vanguard is not going to be you either. Because you’re a boutique, you’re doing something very unique, very niche. And your market is super segmented, you’re going to know the buyers, find the value proposition, and match those buyers, blah, blah, blah.

So, maybe your best case is you raise a billion dollars, which would be awesome. You’re going to be confined, you can’t charge a ton, but maybe you’re in that, like 40 bip to 80 bip range, depending on what you’re doing, and that’s one business model. And because that also has different risk profile on it because it is what it is, we charge a certain amount.

Now, let’s say, and we have had this happen, someone comes in with a big idea, where it’s a big idea, it’s a $50 billion product concept. But it’s a super scale thing, it’s definitely differentiated, it’s very different than with iShares or Vanguard. They could probably compete on price, but this group could compete on branding, whatever it is, their shtick. Well, in that case you might need to get to 500 million to break even if you’re only going to charge 10 or 15 bips. We’re willing to entertain that. That just means that your operating capital upfront has to be much larger, because we as the shovel seller are not interested in owning your equity risk, right? Like, we’re not getting paid enough to take your equity risk. Our platform is cheap for a reason. We don’t want any risk on it, right?

So, if you want to launch a 15-bip product for 50 billion scale potential, we’ll obviously, and you got the capital that we can see in the bank account to float it for 10 years, we might do another form of deal that we would never do. Like, fine, we can’t charge you 10 bips on marginal cost production if your product costs 10 bips. So, we have to work a different arrangement. We’re open to anything. Like, again, the mission of the platform is to help ETF sponsors win. Not help boutiques win, not help iShares win, not help — we just want to find a way to help you out, basically.


Adam:00:32:09So, how do you guys think about derivatives-based stuff? Right? We, obviously, a couple years ago, were trying to figure out, can we launch our futures-based strategies in the ETF wrapper and decided at the time it was, there were too many compromises to be able to do it. Have the rules shifted? Or has the product engineering shifted to make that more viable now than then? Or are we sort of stuck?

Wes:00:32:46No. I think marketing has improved. And as you guys know, marketing can trump good product all day long. But the fundamental constraints and the fundamental benefits of derivatives through capital efficiency, all these sort of things, they don’t work in the 1940 Act, right? Like, they didn’t even have derivatives and futures around then. Or they did. No one knew about them, or what they were. So, it doesn’t work. You know, for example, like one of the stupidest things, you’re like, hey, I want to own a Treasury future in an ETF, because that seems pretty low risk. But let’s say you have a Treasury future and want to do a four times leveraged Treasury future, well, you guys know the collateral requirement’s like nothing.

So, if you have $100 of cash in an account to collateralize a treasury future that’s maybe four times a notional, that’s not very risky. And frankly, it’s no, it’s hardly any risk, right? But the 40 Act would say, well, that’s a lot of leverage, because this is 4X the time of your thing. However, if I were to go get a 10X, like, I were to go buy a swap from a bank, or a structured product that effectively delivered me a 50X Treasury bond exposure, but it only cost me $5, a notional premium in my fund, they’d be like, yeah, you have $95 and you have $5 in that thing. There’s no leverage in that. And you’re like, dude, there’s a million times more leverage in this than $100 in an account collateralizing a 400% future overlay. What are you lawyers smoking? But the problem is the lawyers run the — they run the rules. They’re not quant finance PhDs and geeks. So, it’s just — they’re getting there though. Like, I think the new derivatives rule, they’re trying to get like the var, where it’s getting more …

Adam:00:34:52But why is it harder in an ETF because I feel like the 40 Act constraints, I could be wrong, but I feel like the 40 Act constraints are kind of the same for ETFs versus regular 40 Act funds.

Rodrigo:00:35:01I think it’s the same thing we asked earlier, Adam, was the advantage of being in an ETF is a tax wrap, a tax advantage.

Wes:00:35:09Yeah. Yeah and access to distribution potentially. Yeah.


Wes:00:35:17But there’s not really any transparency, like — Yeah. Or sorry …

Rodrigo:00:35:23Sorry. Let me just — I think we talked about — just to bring you up to speed because Adam joined in Patrick’s absence. So, we did discuss the fact that the tax efficiency is the same. You’re going to get the same tax benefit in a let’s say a futures-based product in 40 Act as you would in an ETF. I think the other things we’ve discovered is the market makers have a harder time marking to market on futures contracts than they do necessarily on …

Adam:00:35:47No, I think that’s the core challenge, right? That’s kind of what I was trying to get to. Sorry if you guys have already covered it. I obviously came …

Rodrigo:00:35:53No, no, no. No, no. Let’s talk about the distribution angle. So, my understanding was that ETFs have to go through the approval process across platforms in the same way that a mutual fund does. Am I incorrect in that?

Wes:00:36:08Not true. So, ETFs have an infinitely better time, right? So, if you’re a mutual fund, and I didn’t even know about this until recently. But you want to be on Schwab’s platform to get access because of the transfer agent fees and also other stuff, they’ll charge usually like 10 bips. Every time you make a sale, they take 10 bips of it. That’s not even to be on like the preferred or any of this stuff, or to be the commission free. When we launch an ETF, day one, you are available for trading on Schwab and there are zero costs to anyone, right? Well there’s costs through like payment for order flow, but there’s no commission. There’s no weird behind the scenes. Like hey, give us a cut of your …

Adam:00:36:56Platform fee and stuff. Yeah.

Wes:00:36:57Yeah, there’s none of that.

Mike:00:36:58The “something B” fund, something B. Anyway, doesn’t matter.

Wes:00:37:03Yeah, I don’t know. So, mutual funds come at the world through an ecosystem that just like, the rape and pillage on them, whereas ETF, I don’t know how we pulled it off. I wasn’t part of this. But when you launch an ETF you’re available on all open architecture platforms essentially. If you’re trying to go to a wirehouse like Merrill, obviously, they’re going to tell their clients oh yeah, you don’t want to do that fund. It hasn’t done due diligence. And then magically, if I go talk to the department and say hey, do you want a million dollars? All of a sudden that fund passed due diligence. So, there’s a lot of backroom crazy … when you dig in the weeds on these things.

Tax Advantages

Rodrigo:00:37:48Okay. So, default is being ETFs or on, really it’s on the platforms to turn it off or disincentivize people to invest in ETFs. So, you got the advantages of distribution, I guess for those who care, the advantages of …, your tax advantages if you’re doing some sort of … So, let’s talk about what type of ETF underlying products do benefit, can benefit from this tax advantage and how that works.

Wes:00:38:19Yeah. So, the only way you have advantage is if you can do something in kind, right, which really boils down to — Hey, Pat what’s going on, man?

Patrick:00:38:31ReSolve Riffs.

Adam:00:38:32Dude, are you in the old AA headquarters there? That looks familiar.

Patrick:00:38:39This is like an old North Korean banquet hall. It’s just like –

Adam:00:38:49It looks familiar, dude. It looks familiar.

Mike:00:38:50Did Wes just give you his house when he left? He said …

Wes:00:38:52Right, we got to keep costs down, and we got to launch these ETFs, man.

Patrick:00:38:56Yeah. We run a Golden Corral and a small … We’re just, you know.

Adam:00:39:05Show us the bear, man, and the leopard and stuff. Is that —

Patrick:00:39:09The leopard. Yeah, so we got all the weird stuff here.

Adam:00:39:15Oh, that place brings back some memories, dude.


Patrick:00:39:17Yeah, yeah. We got … Sorry, it’s tough to be — There we go. And this is …

Wes:00:39:24Griz is downstairs though.

Patrick:00:39:27Griz is … Griz is downstairs.

Adam:00:39:30He’s the co-host for the podcast for a while.

Mike:00:39:34Yeah, some dinners at that table.


Adam:00:39:39That I barely remember.

Patrick:00:39:40Do you guys want to see Wes’s collection of Justin Bieber DVDs? He’s got like 600.

Mike:00:39:48We were just talking about CDs and DVDs as well.

Rodrigo:00:39:57Big Beeb’s fan.

Adam:00:40:03Welcome, Patrick.

Patrick:00:40:03I’m sorry I’m late, guys.

Adam:00:40:06No, that’s cool, man.

Mike:00:40:07It’s okay. I’ve been dying to get off this freaking transparency tax and access crap. I mean, yeah, I get it. What I want to talk about is innovative products. Shit that’s on the cutting edge. I mean, stuff we’ve had in Canada for months, and potentially years, you know, really. Anyway.

Adam:00:40:31We always need you guys. You know, it’s okay. We don’t know.

Rodrigo:00:40:35Don’t worry. We don’t have to name anything. I know we’re going to wear the veil of secrecy for now. But yeah …

Canadian Crypto Futures Funds

Adam:00:40:43Let’s say someone did want to launch a crypto futures fund, how would they go, but no, I’m just kidding. But that is …

Mike:00:40:52Here’s an interesting thing, Adam. I was talking to Wes and Rod before we were on and I was noticing, obviously, in Canada, we launched a couple of different digital asset products, one for Ethereum, one for Bitcoin and our former futures — head of futures trading, Shaun Cumby who by the way just launched Arxnovum in Canada and is now registered and whatnot and doing some fun stuff there, and is legitimately the G.O.A.T. in Canada, that helped 3iQ launch and navigate the regulators in Canada in order to get them comfortable with the initial closed-end offerings of the Ethereum and Bitcoin funds.

And then subsequent to that, with those having such smashing success, you saw Purpose and Galaxy and 3iQ also launch ETFs. And then subsequently to that, you’ve seen the ETFs launched by companies like Horizons which are based on the futures rather than the coin, and there’s a lot there what I was surprised that was basically how closely the Horizon’s product in Canada had tracked both the physical ETF in Canada, as well as looking at BTC spot, in Canadian dollars. I don’t know if I can just share my screen and show you this. This is pretty interesting, because it hats off to Horizons for being able to do this. But let me share my screen on this one.

Adam:00:42:33Gentlemen, first Mike Philbrick screenshare in the history of the podcast.

Rodrigo:00:42:38It’ll be about 20 minutes, but we’ll get there.

Mike:00:42:51Oh, good. I got the right screen. I thought that was going to be the one with the small people.

Adam:00:42:59This is running on the AS-400, right?

Mike:00:43:02… processor, this thing’s firing up great. So, anyway, this is HBIT, which is the beta pro Bitcoin ETF in Canada, which is the futures-based one. Then you have – yeah, this is all in Canadian dollars because of the charting system, whatever. So, BTCQ, also Canadian dollars, but is holding the underlying and then you’ve got BTCUSD, but then I’ve translated that into Canadian dollars by dividing it by FXC. And you can see, the tracking is astonishingly close. And I’m actually quite surprised, because I thought there would be a much more difficult sort of roll issue in Bitcoin futures.

Adam:00:43:47That’s shocking, actually. Yeah.

Mike:00:43:48Bitcoin futures. And so what I’m hearing from — I was talking to Shaun Cumby the other day too. What I’m hearing is that a lot of the institutions that are looking for access, there’s a couple things they really want. They want to know what’s the index that you’re tracking? Like, what can I benchmark you against, and how are you doing against that? And so what expertise or what background do you guys have in this and what are your thoughts on the sort of the Canadian experience and there’s a lot of talk of this coming to the US in the coming weeks.

Adam:00:44:23In theory.

Mike:00:44:24In theory, theoretically,

Wes:00:44:26Yeah. So, actually, I don’t know if he got the ability to do it, Mike. How does ETH look? Is it similar story?

Mike:00:44:34Well, that’s a great question. I can. I can try. Let me just see. Well, the problem is that we don’t have a futures-based ETH yet in Canada.

Wes:00:44:43Yeah. Gotcha. How do they track the spot though, in general, just like the actual spot, ETF versus actual spot?

Rodrigo:00:44:51That’s a very good question.

Mike:00:44:53Right. So, in the — Let me just look at this. I’m not sharing my screen anymore, right?

Adam:00:45:02What do you mean how do they track the spot? Because the ETF …

Rodrigo:00:45:05… as one defined spot across 100 different …

Wes:00:45:10Whatever you got on like Coinbase, or whatever the, like, you own it in a wallet, that price?

Adam:00:45:15Right. It’s an index so they set the price, based on the TWAP, or the VWAP, in the last five minutes of trading prior to 04:00 PM or something like that.

Mike:00:45:24This is actually part of the challenge, right, that the investors want to be very clear on. I want you to tell me what the index is. Is it a futures-based index? Is it a spot-based index? What time of day are we tracking it? Is it four o’clock, is it eight o’clock? On what exchange, average of a number of exchanges? And so that all gets, I guess, well-defined, but is actually quite tricky. If you look at Purpose, so their launch of the ETF and their tracking to their index was terrible. I mean, it was hundreds of basis points. And so it may have settled down. I haven’t looked recently. But this is the sort of the number one bugaboo. And I guess from the perspective of a lot of the index providers, what I understand is, they’re actually looking to the futures markets to provide that type of indexing.

And let’s face it, it’s a really interesting problem with this particular type of asset class not — I mean, it’s not as bad as oil, thinking about am I rolling front month or 12 month? But there’s some challenges in there and you got two different types of ecosystems. You’ve got a Bitcoin ecosystem, which is very expensive to move things from physical to warm, to cold storage, and then back out. And you’re doing creates and redeems daily. You know, that for the vast majority of those physical coined ETFs in my mind, they’re probably using futures I would think quite actively to hedge that underlying exposure. They’re certainly not going and putting Bitcoin in cold storage during the day. I don’t think. I mean that’s …

Wes:00:47:16Yeah. I’m also wondering how much, because you got the trust down here. I can’t remember what it’s called, but the – yeah, Grayscale Trust, where they got all the arbitrage on, like premium, discount, and I assume there’s like huge future players like doing the spread trade. So, I can’t imagine that as people just launch more and more products, whether it’s future, cash-based, what have you, that all these things will just get tighter because of no arbitrage, and people like to make money in the markets.

Mike:00:47:53The other thing we do in Canada on the closed-end funds is they have a requirement for a monthly redemption at 95% and an annual redemption at NAV. So, way back years ago, we had a closed-end fund, whirlwind of speculation that led to a whole bunch of closed-end funds trading at massive discounts. And regulators just said if you’re going to open a closed-end fund, you have to have these two requirements. So, at least once annually, some redemption feature of X versus Y.

Adam:00:48:25It’s just so sensible. Like, I don’t understand why that’s not the same rules in the States.

Rodrigo:00:48:28Because everybody wants permanent capital, man.

Adam:00:48:32I understand it from the perspective of the issuer. Like if I’ve GBTC and I’m wondering, why would I ever convert? I’ve got captive capital. I’m able to charge whatever I want over the course of the, basically perpetuity. But from the perspective of the SEC, why wouldn’t they take the same perspective? Anyways, this is a bit of off-roading, but I’m just curious.

U.S Crypto Evolution

Rodrigo:00:48:53Do we have a question for Patrick or you’re just going to talk, Adam, for the rest of the day. Patrick, can you talk about this at all right now? Like, what are your thoughts on this whole space?

Patrick:00:49:01So, to kind of tie into what Mike was saying earlier, everybody, at least in our experience talking to lawyers that are filing these things left and right non stop, they don’t have good answers to those questions either. And so what are they trying to do? They’re trying to write the broadest, most vague, Canada is triple black belt, calc level three, and the Americans are in fourth grade still trying to get the flashcards written and made. So, like these disclosures are just you know we’re providing broad, we’re targeting the price of Bitcoin and maybe other things.

And then you talk about the leverage limitations and all these other, you know, if you’re using a blocker, a Cayman blocker. I think it’s just so elementary because the ecosystem is not shopped out. And you’re absolutely right, Mike. Like, if you just say we’re going to track the price of Bitcoin, a retail investor is like okay, cool. Like, got it. But nobody’s — and that’s why a fiduciary is so key. Guys like you who actually understand this stuff, where you can actually say, okay, now we actually have to unfold that a little bit, and or unpack that a little bit, and get into the specifics. So, I think this is just, as you guys probably talked about before, it’s a land grab, who can get there as quick as possible and hopefully, without getting sanctioned by the regulators. So, you just got to work with people and know what the heck they’re doing.

Mike:00:50:24Yeah. Well, the interesting thing is futures have sort of been granted the all clear, not all, like sort of Bitcoin and Ethereum. Ethereum in particular has, I think, sort of this legislative ruling in its favor and Bitcoin is a slightly different interpretation. But they have been interpreted, from a tax guideline perspective, as I understand it as being fairly clear. And then recently, we’ve seen the news that, hey, we would support an ecosystem that used these types of instruments underlying, which is great. I mean, this opens up the door for US investors who have had a heck of a time. Canada and South America has launched several products in this thing, the Middle East.

I mean, I think the 3iQ product almost trades like 22 hours a day because it’s listed on a number of exchanges across the world. And then as you said, you’ve got sort of, I mean, fourth grade in the US, it’s harsh, maybe it’s sort of semi true, but just a slower adoption in the face of pretty substantial investor demand. I mean, you just look over to Coinbase, and see the number of accounts they have, it’s larger than the number of accounts at Schwab, TD, and Fidelity; some ridiculous thing like that, that Matt talks about, from Bitwise.

And so you’re seeing mass adoption, like you’re seeing some sort of movement within sort of a retail space anyway. So, it’s just a really interesting space. But there’s a lot of thought that has to go into how one might get exposure. And I think just one last thing, Rod, before you jump in, not your keys, not your coins is an extremely dangerous statement. You know, when someone thinks about a bearer asset that you will own, that has a whole set of different security precautions that you would have to take as an individual rather than owning a financialized product.

And this is where I think that that’s the gap I kind of, if I gasp at anything in the US regulators, that’s where I would be like, okay, come on. You’re forcing a whole bunch of people to hold this bearer asset in a way where like, let’s just financialize the asset and allow the access.

Rodrigo:00:52:50This IBM certificate from your grandmother that’s in your home safe, right?

Mike:00:52:55Correct. With a signature on the back, right? Like, I’ve signed it, and I put it in the vault.

Wes:00:53:02You know, what’s funny about that? I was actually at a conference last weekend, because I’m not a — I don’t know that much about this crypto stuff, but everyone there knew a lot about it. And they’re also half my age and 10 times richer. And one of the guys actually told me, because he’s one of these like, holdover guys, and he’s pretty famous. And he says, like, the security thing is real. Like, because they know oh, this guy, if I know he owns his own wallet, I’ll go put a gun to his head because I know, he is literally holding this. And he knows the password somewhere, I can just steal 10 million dollars.

Mike:00:53:38Gun to his head? No, we’re not going to put a gun to his head. We’re going to chop off his left hand and he can still use his right hand to punch the keys and then figure out how much he wants to have his right hand.

Wes:00:53:50I know. So, he has like no — Part of his crypto thing is he literally has like security protocols. I was like, wow, I don’t even — I never thought about that.

Rodrigo:00:54:01Doesn’t your brother, Mike, did security, or does security?

Mike:00:54:03My brother does corporate security. And he has worked for several, both movie stars, but also crypto. So, done full-housing design, panic room, type stuff, drive routes before they go somewhere, make sure they have escape routes, all that stuff, because — I mean, you’re talking people with serious coin obviously.

Rodrigo:00:54:24Yeah. I mean, it would be the equivalent of a billionaire having all of his money and gold bars in his home, right? Like, the only reason billionaires can walk around is because nobody can get access to it even if they capture them. Right? So, it’s just such a silly thing. Patrick, just back to the question. Just from a regulatory perspective, I’m curious whether you have all these different offerings trying to get to market and we’ve talked about the complexities of pricing and how are you going to get access to it. Is it that the regulators are being thrown 20 different ways of getting exposure to Bitcoin and they don’t know what to do about it?

Patrick:00:55:05Yeah, I mean, I don’t know if this is the beauty of the American bureaucratic design that the forefathers made, or founding fathers made 250-300 years ago or what. But you’ve got three key issues. You’ve got one, Fed wants to treat it like a currency. SEC wants to treat it like a security, and Congress is getting pulled in other directions. And you can look at the letter Senator Warren sent to Gensler and says, you need to regulate Bitcoin, you know, get your act together. And then Gensler is like hey, this is really cool. As soon as Congress writes a law that gives me the mandate to regulate this I’ll be more than happy to help you, Senator. It was the most passive aggressive response ever.

So, yeah, I think it’s just we are not — I mean, even across democracies, we’re more fragmented and slower if you will, and I think this new innovative product, I mean, you saw the Facebook hearing, it’s like we have we have senators that can’t understand what Facebook is. I’m going to try to explain crypto to them. I mean, it’s just a whole nother jujitsu level of knowledge that they don’t have.

Mike:00:56:21But isn’t that a false excuse? Like, come on. How much knowledge do these senators have about natural gas exploration or junior silver mines or junior lithium mines or triple leveraged silver ETFs? Like, honestly, isn’t that a bit of a cop out?

Patrick:00:56:43No, I agree with you. I agree with you. It is a cop out and why is it a cop out? It’s a cop out because crypto is a great dis-intermediator on so many levels, right? You think about all the, you know, being able to just buy currency without paying a commission, being able to …

Mike:00:57:01Oh, Jamie Dimon’s thinking about it and he’s in the news every day.

Patrick:00:57:05Yeah, right? Yeah. So, is all this a false flag? Oh, we got to take our time. We got to really evaluate this. How much of that is genuine versus I got to protect my job, I don’t know. But definitely the latter I think to some extent.

Mike:00:57:24It’s a —

Adam:00:57:25That’s a good cynical take. I’m totally buying that. There’s also, like I guess a reserve currency question and an AML question, and there’s obviously a massive interest in, especially in the US for AML anti-terrorism and you know border control and war on drugs. Like, there’s just so many competing interests to make sure that you don’t enable money laundering and all that kind of stuff I guess. If you wanted to be generous in your interpretation of what’s taking so long then you’ve got a few excuses. It’s so unlike me to give them these outs.

Rodrigo:00:58:08Yeah, there you go.

Patrick:00:58:09This guy.

Rodrigo:00:58:10I’ve been reading your Twitter profile recently, Adam. You certainly, that is very real.

Mike:00:58:14You are much more Patrick’s camp. What’s going on?

Adam:00:58:18No, he’s more in my camp, whatever.

Rodrigo:00:58:22So, Patrick, one of the questions with regard to ETFs and Bitcoin, right, Bitcoin trades 24/7, and the ETF product will trade five days a week, half the day or less than that. There’s also overnight markets, right, and stocks where things trade in different ways. What do we expect that to be if we were ever to launch a Bitcoin ETF that can mark to market somewhere? Like, do you expect these shares to trade overnight, overseas, over the weekend?

Patrick:00:58:57We haven’t gotten that far and that is what terrifies me about these things, right, is how do you manage that over a weekend? I mean, we have all this extra plumbing for international funds with just a 12-hour time zone difference. If you have a fund that holds Japanese securities, all of these valuation procedures come into play. So, I think the path that the US is on is a good one which is, look, we have to get on board with something. The futures markets can handle this, and let’s kind of rip the band aid off in this one sector and see what happens. But I think it’s going to be a lot of watch and observe and see what happens. So, I don’t have a good answer on that, frankly.

Adam:00:59:45What’s the opportunity for those who — I mean, the roll yields in obviously, OTC futures against spot like have been pretty juicy since the origination of crypto. Do you envision a big portion of the use case for these types of futures-based products being to facilitate this kind of arb for people that don’t have derivatives licenses or is that a big — I would think that’d be massive but I just have no — I don’t know.

Patrick:01:00:27I don’t know. I would think whenever the — that has to get arb’d at some point. I just don’t see how that’s sustainable longer term. I don’t know Wes, do you have — I think that’s —

Wes:01:00:39I mean, a lot of times — Yeah, a lot of times futures are in contango or backwardation for a reason. Like, I’m sure the one in crypto might be inefficient right now, but over time, there’s a reason for these things, right? You know, it’s like VIX. Like, yeah, I know that if I short VIX futures, in theory, I could make 20%, but I can also die tomorrow, right? So, usually, prices are roughly correct and markets are roughly efficient. And that may not be the case right now, but I can only imagine that if and when a lot more products come online, a lot more cross arbitrage, you know, a lot more capital comes into this game. Let’s say the whole curve is super contango, it’s probably that way for a reason.

Adam:01:01:29Well, I think it’s that way because it’s so far been really challenging to take a meaningful proportion of fiat and move it into the crypto ecosystem. Like, it’s just really hard and it’s really risky. Fiduciaries perceive it as risky.

Wes:01:01:46Yeah, yeah.

Adam:01:01:50There’s a lot of — I don’t know why Siri keeps popping up.

Mike:01:01:53It’s a self-financing organism or ecosystem as well, right? So, the cost of funds is a little bit different. It’s not Schedule One Bank financed through lots of money sitting on balance sheets to fund whatever you need to take whatever arb about of whatever financially approved market.


Adam:01:02:12But it’s just really hard for institutions. Like, the vast majority of capital is held at institutions. It’s very hard for institutions. The other side of the arb is you got to hold spot Bitcoin, right? That is the hard part, right, so you’ve got people want to get exposure to the asset. They can’t get exposure by buying spot because moving from fiat into the crypto ecosystem is risky for a variety of reasons. Tax, regulatory, fiduciary, ERISA, or whatever. Yeah, personal. Yeah. And so you’ve got this massive supply/demand imbalance and so that needs to be funded by, whatever capital is in the crypto ecosystem needs to fund that, and it needs to get an equivalent rate.

And so until they make it easy, regulatorily, tax, and through the financial system to move a meaningful proportion of institutional capital into the crypto ecosystem where they can own spot against the futures to arb the basis, this thing’s going to be really juicy. So, I can’t imagine that’s not going to be a major use case for problems like this.

Rodrigo:01:03:25I know I promised Wes that we would let him go six minutes ago. Wes, how are you doing? Do you got you got to hop off?

Wes:01:03:31Yeah, I actually got to leave in about nine here. Like, I got a call at five but I can …

Rodrigo:01:03:36You can drop off whenever you need.

Wes:01:03:38Yeah, I’ll just drop off.

Patrick:01:03:39Who do you have to talk to, Wes? These guys have been in the trenches with us for years.

Wes:01:03:47I know. You can look at my calendar. I can’t exactly miss it.

Patrick:01:03:54Oh, Justin Bieber concert. Got it.

Mike:01:03:55Justin Bieber’s doing a live stream. He’s down at the Sandbar. Other Players

Wes:01:04:04Yeah. Well, I mean the other thing is I mean, I just know just from seeing on like the private side, there’s a ton of capital going into hedge funds or whatever that are doing like arbitrage. So, like, hey, it may not be going through the formal markets, but there’s a ton of hedge funds that are raising a ton of capital to do arbitrage activity and making spreads and making markets. So, it may not be like Susquehanna, well, it is probably Susquehanna. But it may not be like well-known players. There’s definitely huge operators that are raising vast piles of money.

Rodrigo:01:04:38So, I can give some insight into that. But Mike, can we talk about this?

Mike:01:04:45We can talk generally about insights that we would have on that particular topic. Yes.

Rodrigo:01:04:59You know, there is a lot of interest from Susquehanna and the big prop desk, people that are built by private, that are reaching out to certain firms outside of the US jurisdiction, no firm to be named, because they can’t do the trading themselves. If you’re a resident of the United States, and you try to arb out this spot versus derivatives across a hundred different exchanges, right, you’re not allowed to trade derivatives, it’s illegal, right? So, you can’t even trade.

Mike:01:05:30Exchanges won’t allow Americans, right.

Rodrigo:01:05:33Americans to trade in those securities.

Mike:01:05:34Exchanges won’t allow Americans because they don’t want the ire of the American regulatory, the global lead of regulatory financial assets, they didn’t want to fear that ire because it’s too big of a market.

Rodrigo:01:05:48So, what they’re doing for the first time ever, in their experience, because they generally do — they have their own trading desk that for the first time that I’ve seen, that I have been reaching out to individual offshore companies, let’s just say, that are already running these type of arb sites. They’re willing to buy the fund for the first time. So, I think until something gets regulated for the United States where, that allows these big firms to trade offshore in this space, there will be a ton of dislocations. And also, the other thing, we’re not talking about dealing with two or three exchanges here. We’re talking about a hundred different exchanges that all have their own spot price for Bitcoin at any given time during the day. So, I think this juice is going to be available for a long, long time, and even the big firms won’t be able to take advantage of it.

Mike:01:06:42I would add, Rod, we’ve even seen those types of companies setting up their offshore arms, right? So, you see them setting up in Bahamas or Cayman or wherever, because they can’t do it from US soil. So, yeah, of course. And they’re setting up arms. Yeah, which they’re doing. I mean, that is happening. So, there is a flow of talent and capital that’s leaving the United States in order to accomplish this as well. Which is something that …America’s wonderful, they’ll get their head around that.

Adam:01:07:17Definitely. Yeah. But to Wes’ point, right, there are absolutely arb funds that are being set up, but in the context of a $2 trillion market cap ecosystem, a billion here and a billion there in these arb funds is a drop in the bucket. Right? So, until the US, primarily the US, there’s other jurisdictions that threw up barriers as well but, until the US unburdens, or liberalizes, some of the regs around this, it’s just going to be virtually impossible for a meaningful amount of capital flow into this at an institutional level, to close these gaps. I mean, we observe these constantly and the opportunity in arbs of all types have not converged in any meaningful way at all over the last nine to 12 months as we’ve been sort of scrutinizing fairly closely. So, I think products like this, that sort of futures-based ETFs are an interesting way for institutions to be able to — I mean in a time of like razor-thin yields everywhere This is a very attractive yield product if done properly. So, it’ll be interesting to see how the demand for that evolves from institutions.

Mike:01:08:43Well, gosh, we’ve even done a split share corp here in Canada, right, or here in Canada. I’m not in Canada. But in Canada there was a split share corp, but I don’t know if you guys remember this happened in the US a lot. But they take an asset, they do some covered writing, they do two tranches, they have a preferred share and a capital share, right? The cap share is levered two times and the preferred share single leverage but 6% yield, and the preferred share has a …

Adam:01:09:13All the dividends accrue to the preferred share and there’s a guaranteed yield.

Mike:01:09:17What’s left over accrues to that, yeah. Anyway, so I mean those were circa the year 2000, 2001 there, again a product in Canada and we saw them on Canadian Oil Sands and all kinds of weird resource stuff, and now being marketed for Bitcoin as well. So, the …

Adam:01:09:36Selling covered calls for the income sleeve, which is a pretty neat strategy.

Mike:01:09:43A hundred vol assets, it’s not a horrible thing.

Adam:01:09:44Yeah, exactly.

Wes:01:09:47Well, I mean, what is the yield? I don’t look at the implied vol on these? Like, you do like a …

Rodrigo:01:09:53Yield today on Ethereum?

Wes:01:09:55Yeah. Like, what’s the yield? Like what do you …

Mike:01:10:01Yeah. That was 70% but it was for a few hours and it was against … But no covered writing is different. But I mean, just the options are 100 vol plus. 100 to 150 vols, so I don’t know. You get 25% downside protection, I guess, about if you covered right.


Patrick:01:10:21That’s amazing.

Wes:01:10:26And a big-ass spread to get them spread like 25.01 or something.

Mike:01:10:31Well, I mean, it depends where you are in the ladder. But yeah, it can be. And then a lot of those types of products, when you go off into the world outside of the United States, are actually RFQ, right. So, there is no option ladder, you just put in a — they give you a quote of what you’re — I mean, you get to totally tailor your option to whatever it is that you would like, days, you know, amount from strike, etc. Totally customized. Obviously, when you go to sell said option or close said position you’re also going to them for an RFQ. So, that’s probably a little unnerving, or could be.

Adam:01:11:16Are you expecting that these ETFs are going to be optionable eventually, like presumably they’ll be optionable relatively quickly? Probably not even on your radar is it?

Patrick:01:11:28Yeah, I mean someone just has to get the … someone’s going to be doing it for sure. Someone’s going to get the … in place and then again it’s the derivative.

Adam:01:11:35No, I mean like publicly. Just like public option chains on the listed ETF even. Right?

Patrick:01:11:42Yeah, for sure.

Adam:01:11:45That’s …

Wes:01:11:45If someone can make money they’ll probably launch it. That’s usually how it works.

Mike:01:11:53But today, is anybody beating RIGS today? Come on that, thing’s got to be un fuego

Patrick:01:11:59We can neither confirm nor deny any of —

Mike:01:12:05No, RIGS is an ETF you have, no?

Wes:01:12:07Yeah, yeah.

Patrick:01:12:10You guys want to talk about value investing?

Wes:01:12:12Yeah, yeah. I was about to say that. Let me tell you about value investing. We probably spent what, because we’ve been doing that since 2012. And that’s a long time. And then I compare that against some crypto mining thing and I’m like wow, the NAVs are the same. Except one’s been around for nine years now, and the other one’s been around for two months. I just gave up thinking too hard, Mike. I don’t understand how it works anymore. But that’s alright.

Rodrigo:01:12:45I’m trying real hard over here.

Adam:01:12:48A moment of silence for thinking too hard, Wes.

Mike:01:12:52Yeah. You and Adam should start like a help group or something.

Adam:01:12:57That’s right, exactly.

Mike:01:12:59Mike doesn’t think at all.

Wes:01:13:01No, Mike, you know what we started, a shovel selling group. That’s what we started. I’m not going by it anymore.

Mike:01:13:10We thought about it and we said you know we should sell these dummies picks and shovels. I mean, what?

Wes:01:13:22Exactly. All right. Well, I got to bounce. You guys keep talking about important stuff. Adios.

Patrick:01:13:34Hey, hey. You guys hiring? You guys hiring? This isn’t live, right? We can just talk.

Rodrigo:01:13:41Somebody shitting on you with all these launches?

Patrick:01:13:47Oh, it’s good. It’s fun. What I like about it is you get to talk to these lawyers. You’re talking to the SEC every day about just all the crazy stuff that’s going on behind the scenes. Like, someone files and they want to use the Canadian ETFs in their crypto product and then the SEC calls them 24 hours later says no you can’t do this. It’s just — that’s the fun part, I think. But yeah, everyone has ETF monitoring because …

Rodrigo:01:14:14That’s an interesting question with regard to, you know, you guys are launching or have launched and are running this Alpha Architect. What do you call it? The Alpha Architect? What do you call it,ETF Architect?

Patrick:01:14:23ETF Architect. Yeah.

Rodrigo:01:14:27So, the ETF Architect process, you’re talking about minimizing costs and all that but there’s got to be operational alpha, and I imagine a lot of operational alpha with connections with the right lawyers and the right people to talk to in the regulatory environment.

Patrick:01:14:44Well, yeah, I mean, just like you guys, right? Like we’ve been in the trenches for a long time together and you start to learn how to set the stuff up, you start to learn. And the thing is, is we were broke to start, right. So, this industry was built and Mike, back in your days, Scotiabank. Like, you had the infrastructure, you had the personnel, and now it’s like, okay, now you’re going to be in Toronto in an apartment, you just got to figure it out. The same thing with us, right? So, yeah, there is a lot. There’s a ton of fat in this industry still. I mean, it’s a bloodbath, right? But there’s still a ton of fat. And there’s all these things. I mean, I think there should be a day where you should be able to launch an ETF for under 10 grand. There’s no reason. There’s no reason.

More on Costs

Adam:01:15:24Well, how do you guys price that now? Because Wes said something about having 500 grand in operating capital to sort of start How do you divide that up between the ongoing operating costs versus the launching costs?

Patrick:01:15:39So, the operating capital requirement — you have two. I mean, funds close all the time, right? So, you want to try and separate the wheat from the chaff. So, we basically say look, the ongoing costs of running an ETF, very ballpark, call it 20K a month. Like, we want you to live for at least two years with like, no success. Right? And so that’s why we throw that number out there. But the operating costs, right now we’re seeing like about 60K, maybe 70K if you’re doing something more exotic. But when I look at the work, when I’m the one making the sausage in the back with the attorneys, I’m like, this is so inefficient. This is so 1980s. We’re still like, we don’t have a fax and we don’t have green visors with calculators, but it’s almost that bad.

Mike:01:16:28The abacus.

Patrick:01:16:29Yeah. So, yeah, but what you guys are doing, I mean, you guys are innovators, and super smart and nimble, and you’re doing things that no one else is doing. And I mean, that’s just, I think it’s kind of two different sides of the same coin, frankly. Just need new blood in there to figure it out.

Adam:01:16:45Well, I think we’re continuing to operate in a 1980s paradigm, right? And sometime over the next five or 10 years, this entire tech will become antiquated and it’ll just move entirely into the tokenization space into DAOs and all of this stuff, which was designed to work with fax machines. And people were sitting in an office signing papers, right, will be recognized as the antiquated tech it is and they’ll be viable alternatives that everyone will agree to, right. At the moment, we haven’t converged on a common narrative where that’s accepted, but it’s coming.


Rodrigo:01:17:28But it’s a combination of the 40-year-old tech and the 80-year-old law. I mean, is it 80 years? Yeah. And the 1940 Act, right. 1940 for a reason, a lot of it we go back to that over and over again.

Mike:01:17:41Not so much has changed at all

Rodrigo:01:17:42We need to figure out what we can and can’t do.

Patrick:01:17:44Yeah. Yeah. Well, I mean, to the SEC’s credit, like they’re trying their damnedest to keep this thing updated. They did the ETF rule, they got custom baskets allowed, they’re trying to figure out how to satiate the demand for crypto, right? But you’re right, wherever you go, it’s still these old rules. And I will say another part of operational alpha and I hate to sound hokey, but it’s also just like, you got to be good people, right? Like there’s no substitute. I mean, you guys know, you can be the smartest person but Philbrick’s the one cracking jokes up front and people are like, how could you not want to follow Philbrick out on the football field? I ask myself that everyday.

Adam:01:18:31That is true. That is true. Just don’t eat the donuts.

Mike:01:18:33Yeah, don’t eat the donuts. That’s a story for another day.

Rodrigo:01:18:38Why? Why is it another day? I swear to God one day you’re going to have to tell that story.

Mike:01:18:45I’m not talking about that story. That’s not happening right now. Those who know, know and those who don’t know can use their imagination.

Rodrigo:01:18:52Do you have like a crew of lawyers internally that deal with all this? Or do you have lawyers externally that you like to work with that know the space, connections and all that important?

Patrick:01:19:09Yeah, the latter and I think …

Adam:01:19:10Wes is not going to retain in-house counsel.

Patrick:01:19:18What you do is you find a washed-up MBA with no hair and just trying to prove something to his wife who long ago gave up on their marriage and then you have him … yeah, what we try and do is we try and like deconstruct all that crap. We say, okay, where are the legal minds best suited? Well, okay, they’re best suited for these pieces. And then okay, what can be done by an idiot. And then we try and replicate that or outsource that, and do it quickly. And then you pull in the lawyer and then what you say is you say, look, give us a good discount on price we’ll make it up in volume. And then what we try to do is we try and just keep them engaged on the stuff that actually matters — on the stuff that is what worth $500 or $1,000 an hour and on page numbers and stuff like that.

Adam:01:20:06No, that’s good … you know, the core task, the most important task not, prevent scope drift. Like, so much extra costing comes from just not staying on all of the service providers who are all obscenely expensive. And this is less true with I know what you’re currently doing in the crypto space. But a lot of what all of these — everybody’s doing in the ETF space, we’re not reinventing the wheel every time we file a prospectus. Like 80 to 90% of that copy is template.

And yet somehow the lawyers get away with charging you, everybody the same amount as though they need to completely recreate each document from scratch at $500 or $1,000 an hour. So, getting good service people who are willing to cut you a break and recognize that there’s a lot of overlap from prospectus to prospectus or for filing to filing. I’m sure that’s got to come in handy.

Rodrigo:01:21:13Well, correct me if I’m wrong, Patrick, but the reason you have your template is because we’ve been told by our Canadian lawyers at least, that they’re not allowed to copy somebody else’s prospectus, right? That they’re not allowed to copy somebody else’s compliance document. That is unethical from a legal perspective that we have to do something unique for you, and so they get away with creating something from scratch. If you’re internally coming in with a document that’s 90% filled in and then saying just fill in the 10% that we actually don’t know about, you’re probably able to get a much better — that type of operational alpha that we’re talking about.

Patrick:01:21:51Yeah. I mean, boy, we look at it down here as what is the purpose of these legal documents? The purposes of the documents are to protect the investor at the end of the day, right? It’s to clearly and succinctly explain what the heck grandma is buying in her Schwab account. So, if there’s a better disclosure out there, if there’s a better mousetrap, everybody’s better served. And are we just copy-pasting iShares prospectus and dropping it in? No, you still have to think about the risks and all that stuff. But, yeah, I mean, how many long only funds need to be rewritten from scratch?

Rodrigo:01:22:31And talk to three different lawyers you get three different answers.

Patrick:01:22:35Yeah, yeah. And here’s a great source of operational alpha for us. Don’t be a dick. If you respect a service provider’s time on a weekend and nine to five, do your best when you can, like they’re going to like working with you. They’re going to cut you a deal because they have plenty of clients in New York that are sending them emails at eight o’clock on a Friday and asking them — and sometimes we have to do that. But that to me has been the most surprising source of “alpha” if you will. It’s like, just respect people’s work life balance and they will seek you out.

Rodrigo:01:23:15What a whirlwind of a career you’ve had with Alpha Architect from when we first met. Yeah. You found your niche and passion.

Mike:01:23:23You try some stuff, you pivot, you try some stuff, you pivot. You guys have been very open-minded and opportunistic, I think pretty commercial, the journey that you guys have been on.

Patrick:01:23:35And to you guys too. I mean I look at you guys as a bench, not benchmarking in a competitive way. Just hey, who’s doing what. And one thing I really admire about your shop is just how, the quality of content, but it’s not just quality. It’s like it looks good, it’s packaged well, it’s deliverable to someone without a PhD, right? And I’ve always admired that about you guys.

Mike:01:23:57Well, Rod’s the design guy for sure. He’s got that.

Rodrigo:01:24:02Well, Patrick, I was telling my wife the other day that it’s so rare literally, yesterday I was talking about your success, Alpha Architect’s success and how I was — like you want — someone would see from the outside that we may be competitors. I never see ourselves as that. But I literally was almost overjoyed with tears of your success over the last few months. Like, you guys are an incredibly genuine team. We love you guys. And I’m really proud of what you guys have accomplished. And I’m sure you’ll continue to create amazing things.

Adam:01:24:34Just most recent win, especially, like this is absolutely magnificent. We’re all celebrating on your behalf.

Patrick:01:24:41Yeah. We’re really excited about the new lease we signed. I’m very excited about it. Overjoyed. Yeah. We are getting an office. I’m stoked. We’re getting like a real office with bathrooms.

Mike:01:24:59Are you really stoked? Or are you a little bit disappointed?


Rodrigo:01:25:04No, no, no. You’ll remember this with fondness.

Patrick:01:25:06Yeah. No, it’s good.

Mike:01:25:07Yeah, amen to that. Amen to that. I did love the one, I think it was — I can’t remember if it was a Twitter video or something you posted with the back test a guy sent you to launch an ETF back in the day. That made me cry when you put it in the fireplace. That was beautiful. I get those emails too.

Rodrigo:01:25:26Pray tell, what was — can you flesh that one out a little bit more?

Patrick:01:25:30Yeah. So, Wes is like we need to be funny, we need to be edgy and you don’t have a PhD so have no intellectual value. Do something funny on camera. I was like okay.

Mike:01:25:40Adam says the same thing to Rod and I.

Patrick:01:25:45So, I made some videos — he’s coming back by the way. But I made some videos of like, basically a guy’s like, “Oh, you have a back test and a good idea? Let me run that through our due diligence department.” And I like pick up a stack of papers and then I throw it in these roaring flames off camera. Like, “We will get right back to you.” Stuff like that.

Mike:01:26:12Bring him back. We want him back.

Patrick:01:26:14Yeah, he’s going to come back. Well, thanks for having us on, guys. It’s awesome.

Rodrigo:01:26:21Thanks for … Insightful as always. Congrats and we’ll chat again.

Mike:01:26:26Like, everyone can find Alpha Architect, where can they find the ETF Architect side of things? Is that on the Alpha Architect site? How do people find you guys?

Adam:01:26:35Actually, Patrick, just summarize what exactly this is and who your target client is, and what are you guys trying to build here?

Patrick:01:26:44All right. So, we are targeting folks that are trying to launch ETFs, preferably folks with operating capital, a reasonable roadmap to 50 million. You don’t have to be iShares or BlackRock, but we try and find folks that have a distribution plan because distribution is the ETF business, like it or not. And then we’re just trying to build a co-op of good people that want to share in low cost. I mean, that’s pretty much what we do. We say look, everybody has this fixed cost infrastructure. If we get good people we trust, good compliance operators, we can all just operate on a much lower cost basis. And that’s pretty much it. I mean, we just want to build a Never Neverland of children trying to make it in this crazy world. This isn’t live, we can edit that out, right?

Rodrigo:01:27:38I’m going to put in the beginning in the end. It’s going to be like an opening snippet.

Adam:01:27:43With like Tiger Lily and stuff in the background.

Rodrigo:01:27:48I think that the podcast you did with Meb, if anybody wants to get deep, really understand the journey, the podcast that Meb did with Pat and Wes was absolutely amazing. Look it up and get into it. And do hit the Like Button before we leave and subscribe and share and all that fun stuff. Pat, thank you so much, man. That was awesome. And keep at it.

Adam:01:28:14Hopefully, we’ll see you in person soon, man. It’s been too long.

Patrick:01:28:17Yeah, definitely.

Rodrigo:01:28:17I’ll be in Puerto Rico in March. March 8th. Yeah. So, are you going too?

Adam:01:28:23I visited Puerto Rico and spirit lots of times.

Patrick:01:28:26So, you guys are in the Caymans, and Wes is in Puerto Rico, and I’m in Philadelphia, which just makes me question all sorts of life choices we’ve made.

Rodrigo:01:28:33Yeah, yeah, but they’re your choices, Pat.

Patrick:01:28:37I know.

Mike:01:28:38Are you American, Pat?

Patrick:01:28:40I’m American. I’m eligible for Canadian citizenship, though. My dad was born in Alberta. Yeah.

Mike:01:28:46Well, let me show you around Grand Cayman.

Patrick:01:28:51Good stuff, guys. Thanks for the opportunity, guys.

Mike:01:28:53All right. Have a great weekend. Thanks for joining us on this Friday, everyone. Yeah.

Adam:01:28:57Thanks, guys.

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