Kris Sidial
In this episode, I talk with Kris Sidial, Co-CIO at The Ambrus Group. The Ambrus Group is a volatility arbitrage focused firm that was founded in 2020. The firm takes pride in having a math-driven ethos that specializes in leveraging an in-depth knowledge of volatility skew. Ambrus applies a discretionary twist to quantitative volatility strategies with the purpose of protecting investors from tail risk events in the U.S equity markets.
Kris and I talk about “buy the dip” dynamics to markets. Can a hedged market crash? The no ego style of managing a Hedge Fund. Opportunities for retail investors in areas that institutions will not touch. How did he trade the VXX dislocation.
I hope you enjoy this conversation with Kris as much as I did…
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Have comments about the show, or ideas for things you’d like Taylor and Jason to discuss in future episodes? We’d love to hear from you at info@mutinyfund.com.
Transcript for Episode 30:
Taylor Pearson:
Hello and welcome. This is The Mutiny Investing podcast. This podcast features long form conversations on topics related to investing markets, risk, volatility, and complex systems.
Disclaimer:
This podcast is provided for informational purposes only, and should not be relied upon as legal business investment or tax advice. All opinions expressed by podcast participants are certainly their own opinions, and do not necessarily reflect the opinions of Mutiny Fund, their affiliates or companies featured. Due to industry regulations, participants of this podcast are instructed to not make specific trade recommendations nor reference past or potential profits. Listeners are reminded that managed features, commodity trading, Forex trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they’re not suitable for all investors, and you should not rely on any of the information as a substitute for the exercise of your own skill and judgment in making a decision on the appropriateness of such investments. Visit mutinyfund.com/disclaimer for more information.
Jason Buck:
So Kris, spring has sprung. Is New York city back? Are you hanging out in the parks? Are you getting the sun back? Are you going out there and out and about? I mean, is everybody back in the city or is it slowly coming back?
Kris Sidial:
No, I would say that Long Island is more so fully back. Just for everybody watching. I know you guys are seeing the Bloomberg screens in the back. This is not a Zoom background. This is the actual … this is our actual conference room. So I apologize there are no cool room screens in the back. But yeah, as for Long island, it feels like everything is back and up and running. The city, as well, I’ve been to a couple of conferences in the city over the last few weeks. But you’re still getting a couple of people that are more COVID sensitive. Then you’re just hearing this news now about the derivation of the new strain coming to the US. So, who knows? I have no clue.
Jason Buck:
And you always tell me you never get nervous, but right now you’re fidgeting and clicking your pen so I’m going to ask you to throw away the pen.
Kris Sidial:
I tried to bring this for an excess mic, but we were having problems ahead of time.
Jason Buck:
Oh, you got a little clip there you’re clicking. I got it. Normally you shake your leg and adjust your jaws, I always bust your balls about. Speaking of which, don’t you think that in the future we’re just going to be like Asian countries have been for decades. You’ll still have, I don’t know, 20% of the population walking around with masks on a more permanent rolling basis, or what’s your thoughts?
Kris Sidial:
Yeah, I think so. I think this is one of these things where it’s going to take a cultural shift. It’s going to take some time for it to go away. The safety precautions, it seems drilled in people’s heads. I feel like soap and people excessively washing their hand has been a trend over the last … which it should be, right? You should be excessively healthy and clean. But I think this new way to live is here to say.
Jason Buck:
And then I think last time we were together in New York, it was like, you had to, you show your vaccine passport, all that stuff now, and mask, and all this. I think it lifted since then, right? Everybody’s back indoor dining, everything, or how’s it set up?
Kris Sidial:
I think there’s still a couple places that are requesting the vaccine card, but not so much with the same sort of force that it was at one point. It was just like you couldn’t get anywhere without the card. So I’d say it’s mixed, but we’ll see what happens going forward.
Jason Buck:
And so that just reminded me that when we were meeting up last time in New York, we met up with Darren Johnson and he flew in from Colorado and didn’t bring his vaccine card and you and I were like, “Are you fucking kidding me? Come on, man.”
Kris Sidial:
We tried to sneak Darren in, too. He was such a nice guy to try to go back to the desk to show his card. I was like, “Man, just come in.”
Jason Buck:
Then, just for context today, we’re recording this on Tuesday, April 26th, just after the market closed. The S&P was down probably just a little over 3% today. But I just give that as context. You and I are texting all the time about the long volatility and tail risk in this environment, not only post pandemic. In 2021, even into Q1, and as we’re getting into Q2 here in 2022 is, it’s been a headwind for long volume tail risk strategies, especially with fixed strike fall. But I think one of the things that you and I always talk about is we haven’t had a real sell-off. I mean, it’s starting to seem like that now again. We’re maybe seeing a little bit of liquidity cascade here, or maybe you’ll disagree with me there, but everybody’s like, we haven’t seen a true panic yet or a true sell-off where tail risk tends to kick in. What do you think? Or maybe you are starting to see that today. What was your take on a little bit of jitters and fragility today?
Kris Sidial:
So, I think that this is a really interesting point because it’s one of those things that are not really talked about, especially because people have an interest in things like tail risk or long volatility, but they don’t necessarily fully understand it. So it could be that middle ground where you think you’re in something but you’re not really in what you think you are in. Like over the last … actually over the past couple of months, you haven’t really seen that fear transpire in the equity market. More so in rates val and FX val, you’ve seen that from a cross asset standpoint. But specifically in equity val, there hasn’t been that massive, excuse me for cursing, oh, shit moment. You’ve seen the market slide down and people are like, “Man, I’m not really hedging too much,” or “I’m not really too concerned.”
Kris Sidial:
To be quite honest, I don’t blame people for seeing that. As you know, you and I have had this discussion. Even though we’ve run a vol book, I’ve been more so personally thinking that this is skewed more towards the bullish side. I thought that structural flows are going to support equity markets more so. The TINA effect would play more relevant. I thought the positioning dynamics would play more relevant. These sorts of things. And I still do. I know that may sound crazy to most people, especially because you’re a vol guy and they’re saying, “Well, don’t you think the market’s coming in a crash or whatnot?”
Kris Sidial:
But as a whole, I would say it’s one of those days where you actually really saw fixed strike goals move. You saw skews get moving, fixed future term structure starts to get into a slight backwardation. It’s hard for people to understand when you get that real fear. I know I have a couple of tweets out, and you and I talk about this a couple of times as well, but when you have that real fear out there, there are dislocations and things that occur that will show you that there is that real sense of fear. Relative value spreads start to break, intermarket spreads start to break, things don’t really make sense. You’ll see margin calls from different brokers. You’ll see on the retail side, brokers will cut the amount of lending that they’ll be able to extend. They’ll cut you from trading certain products. The term structure and some of the equity names start looking really wacky and crazy. They look like V’s and X’s and all these sorts of weird things. They don’t make any sort of sense at all.
Kris Sidial:
But none of that has transpired. I think this sell-off was more anticipated from everybody. I think for the first time in a while, you’re seeing that today. You’re seeing a little bit of, “Oh man, can the market dip down lower?” Because a lot of people were conditioned to buy the dip, buy the dip, buy the dip, over the last decade. Not off of the, I would say, narrative that, “Hey, there is structural flows that support the market, but moreso of the winning gambler mentality that stocks only go up.” That was the mentality that a lot of people have.
Kris Sidial:
So I think it’s a combination of all these sorts of things. Me personally, you and I were joking about this, but I think we’ll see one of these end of week rallies where … because we’re going into of the month and you’ve gotten a lot of equity guys that try to print the book up towards end of month. So, who knows? Maybe you’ll see something like this towards the end of the week. But today was one of those days where you got a little bit of a taste of what fair looks like, but I don’t think we’re at that moment yet where you’re in a true sense of danger or fear or skew starts rocking.
Jason Buck:
It wasn’t that you were texting me earlier today like, this is just, wait till the last few days of the month here and we’re going to get a reversal. That was your prediction for a reversal, just to be clear. It was more like gallows humor of like, we’ve all been through this before. You had like third week of January, you had like mid-March. Now we’re seeing it at the end of April here where it’s all a sudden you see long volatile risks starting to pay out mid-month, and then it just gets crushed going back into the end of the month. We’re just all on this weird calendar cycle of showing our numbers the first of the month. So it looks like ball’s not doing anything, but in the interim, on the monthly basis, or even in inter-day, it’s doing a lot of stuff, we’re just not seeing it on the monthly prints. So that’s what we’re kind of joking about.
Kris Sidial:
Yeah, exactly, right. Full disclosure, which is not a surprise or anything, but you guys allocate to us. We have these talks as investor to manager meetings. A lot of times I’m like, “Hey man, the book was really up big today.” But then the end of month print comes in and the book is flat to down or things of that nature, and that’s because that’s how equity vol has been recently over the last few months or so. It’s been that big spike up intra-day on some sort of move, and then the rebound comes, you get this big vol crush and towards the end of the month, it’s the buy the dip mentality. So yeah, it is just this type of manager to investor humor.
Jason Buck:
You’re saying with buy the dip or BTFD, I just wonder, we’ve had a decade plus where that’s just been incentivized and everybody just gets lulled into that false sense of security. So we see that go on for a while. And so, like you said, maybe people are still in that mindset of it’s still buy the dip. That works until it doesn’t work, right? Then all hell breaks loose. I wonder, you love good old trader aphorisms too, and there’s always the one that like, a hedge market doesn’t crash. And so, is that what we’ve seen in the long volatility space. Because people are actually putting on that put protection, fixed strike vol has some skew to it, so we’re not really seeing movement there. Do you think people have to think that like in January stuff like that, it needs to have to go through a few cycles where it doesn’t play out before people take that hedge off and then we could really see market movements? I’m curious how you would think about that.
Kris Sidial:
That’s a great, great, great point. Again, just having the conversation that we have from investors to manager, towards that late November, we had a really nice move in skew. So skew started to pick up, book started to move pretty nicely. Then when you had to move in January, obviously that move in November gave it back, but the move that you saw in January, people were already kind of pre-hedged at that level. So when you got back, S&P got back direct to that level, it was like, everybody looked across the street and was like, “Well, we don’t need to hedge because we just literally re-hedged that first big a couple weeks ago.” I think you saw the relative weakness involved for that January move, saw the relative weakness involved for that February move. You’ve been seeing just straight out relative weakness involved and it’s been that slow grind down.
Kris Sidial:
But one interesting thing about this new little pull in the market is that a lot of the positioning from what we track has showed that not too many people who have been actively buying vol into this. So, shout out to the guys from Squeeze Metrics, they had this post on Twitter and I retweeted it, to not talk too much about how we track it. But they looked at it and said a lot of the put positioning has been leaning more towards hoping to sell. We look at it that way as well. We saw some of the positioning and other factors that we track were saying that, “Yeah, it didn’t really seem that people were aggressively hedging downside.” So that seems to be confirmed now because when the market is sliding down, you’re getting that excess relative strength in vol now, I guess. But if the market slides down a couple more percent, I think you can get that real big move in vol just off of the fact that the positioning is a little bit off size.
Kris Sidial:
Those are the sorts of things that you want as a vol manager, because you want that excess performance and skew. You want when you buy those puts extremely cheap and the market gets in that sense of fear, you make money. A lot of people who don’t trade vol don’t understand, specifically if you’re trading skew that you don’t need the options to be in the money or anything of that sort. You just need the repricing.
Jason Buck:
Repricing a risk.
Kris Sidial:
Exactly. If you get the repricing of risk, that is enough to have a vol book return 100%, 200% because of the exposure that you have. And you’re not going to get the re-pricing unless you get the sense of fear. So when you get that fear, that’s when you get the re-pricing, and as vol traders, that’s like jackpot. But if you’re not getting that repricing in an IV, it could be a boring game, in a sense.
Jason Buck:
But as part of that buy the dip mentality or that a hedge market doesn’t crash, the other one I always hear all the time is the Fed put. But you always talk about inflection points and chaos theory and everything. I don’t disagree. The majority of the time a hedge market doesn’t crash. The majority of the time the Fed puts worked. But what happens when it doesn’t? Like you said, as soon as we start getting up until those Fed put zones or those where all the hedging is, people start to get a little worried, a little fearful. But if we break through those, that’s like beyond fear. That’s like sheer, outright panic, and the market just hits an air pocket. Is that a way of looking at it too? We just haven’t seen it yet. It doesn’t mean it won’t happen, but if it breaks through there, it doesn’t mean it will happen either. But that’s where you have just sheer, absolute panic.
Kris Sidial:
Absolutely. Absolutely. I think it’s a byproduct effect that we’ve been so polarized to see equity markets go up and make all time highs every other week over the last decade or so. Even recently, more so over the last two years, since the COVID bottom, people are just waking up, all time highs, all time highs, all time highs. So we kind of forget how markets work and they function and a 5% pullback in the S&P off of all time highs. I would argue that’s well within the realm of a healthy market or a healthy market correction. That’s not a “tail risk event.” But a hundred percent, if you get into those pockets where positioning is off sides and people are trapped and you get that “oh, shit” moment, it could lead to that big repricing of risk where vol starts to really outperform and really blow up, and the derivatives on some of the vol stuff that you’re carrying start to get repriced at those massive levels.
Jason Buck:
Then you were talking about … we referenced, what is your mandate? Your institutional mandate. I think a lot of retail traders investors might miss this when we start talking about institutional highest hedge funds and everything. It’s like, the idea is you run a very niche strategy and that’s exactly what allocators like myself look for. The idea is like, I need you to do a very specific thing in your equity vol space. Then specifically, use a lot of dispersion trades and single name equities.
Jason Buck:
But we’re seeing a lot of explosion in rates vol or fixed income vol, or you could be searching for cheap convexity around the world. But that’s not your mandate. So everybody would think you’d be able to go anywhere, do anything, you should be able to make money all the time, but that’s not what you do. You have a very narrow niche or constraint on what you can trade. But part of that, like I said, is the single names. And so, I’m going to jump right in, it’s like you were trying to call on Twitter like a lot of people that Elon was going to make his move on 4.20. It didn’t quite happen on 4.20, but his bid was 54.20. And so, I’ll even start with like, “Is he 12 years old?” I just don’t understand this kind of games.
Kris Sidial:
Yeah, man. I don’t know either. I think that’s a byproduct of the times that we live in. One thing that I got this paper coming out, I’m really excited to have you and the rest of the guys read the paper as well because I think you guys will enjoy it. Because one part about it is we talk about the psychological change and how the investor basis mentality has changed over the last five years and the new buying power of the millennials are attributing to more variants in market prices. So it’s just like a psychological thing that the new players now who are inheriting the majority of the buying powers will now impact, their decisions will impact the way how asset prices are moving, which in turn should mean more variants. And you see things like that expressed with some of the leaders that are in the market or in the world now with like Elon Musk, which is a guy who is world-renowned, a very prestigious role in a huge company, have jokes like that of, “Hey, yeah, 4.20 and I’m behind those coin.” Just more playful.
Kris Sidial:
I think the message that that sends to other people who may not be in that position of power is not as good. Because what it could mean is, “Well, here’s a guy who has 300,000 worth of savings and he’s yellowing one-third of that in some sort of alternative coin or maybe yellowing the whole thing on some sort of alternative coin, because it’s cool or fun. It’s all fun and games until somebody loses their savings, which is a whole different ballgame. But yeah, I agree with that. I think Elon is kind of a crazy dude.
Jason Buck:
But part of it’s like, I think another one was like, take Twitter and remove the W hahaha. Like, are you kidding? There’s like, I know you’re saying, it may be a generational thing, I know you’re younger than I am, but Elon’s older than me, but those are kind of like a 12-year old’s or 13-year old’s joke. That’s what I’m really getting at is like, this is kind of just infantile in general. Or do you think that’s just a shift in market sentiment and he’s trying to appeal to a younger generation that may not have maybe the reverence for running … I’m not even saying it’s reverence. These are just bad jokes. I’m just saying it’s lame and you and I wouldn’t hang out with that person. I don’t want to speak for you, sorry. I wouldn’t hang out with that person.
Kris Sidial:
Yeah, Jason’s too cool for Elon. I would hang out with him.
Jason Buck:
But to your point, I’d probably hang out with Elon. But just anybody that makes those jokes, I’d be like, “I’m out. This is ridiculous.” But part of that, I wonder, are you concerned at all? Because you made a name for yourself on Twitter. So are you concerned or you think it’s a necessarily good or bad thing? I mean we’re long way off for him taking over Twitter or even how he’d run it or even his hands on operation at all. But I’m curious to what you think about, because you use Twitter as your primary marketing, advertising vehicle. How do you think about it?
Kris Sidial:
To be honest with you, I don’t really hear too much. I’ve actually been tweeting way less as, I’m sure you know, as the business side of things just pick up. You just don’t even have the capacity to be actively tweeting at times. So no, I don’t really view it as like a negative thing in a sense that he’s coming on. And to be honest with you, if Twitter went under, I just think people would just gravitate over towards another platform. You always get these trends. Back when I was in middle school, it was MySpace, and went to Facebook and then obviously, these things grow and take over. But the finance community has a heavy presence on Twitter. I don’t think that’s going anywhere, but if it does, it’s just like ecosystem. All of the same guys would probably end up on some other platform and then talk stuff there.
Jason Buck:
Are you going to beat me to TikTok? Because I think you’d, you’d dominate. So I want to make sure I get there first. Do you have a TikTok handle yet?
Kris Sidial:
No, I actually do not have TikTok. To be honest, man, I don’t think I’ll be doing much more social media. Social media could be like a pain as well as I’m sure you know. For compliance reasons, it could be a big pain. There’s just so much things that you can, can’t talk about. Then you get some people on there who are just weird people that try to stalk you and things of that sort. I’m telling you, man, it’s a weird place. But then on the flip side, on the other side, you have a lot of nice people that you meet too. A lot of intelligent people that you come across with good ideas. So net and net, it’s a positive. But I think if Twitter dies out, I may die out as a social media person as well.
Jason Buck:
My girlfriend’s been crushing on TikTok and everybody thinks TikTok’s still like teenagers dancing. It’s so far moved beyond that. The average age now is 31 on TikTok. It’s just like you were referencing MySpace earlier, everything moves up the age demographics. So it’s amazing how much TikTok started to move up there. A lot of people think it’s more positive than Twitter in general, or especially more positive than Instagram of just showing this idealized stylized life. But I don’t know. I’ve been trying to figure it out. It’s hard to put financial content into TikTok. But maybe I’m just not as creative.
Jason Buck:
But part of that, what I’ve been wrestling with, like you just referenced, is we have one … I don’t think a lot of people realize the burden we have on the compliance level of running social media like Twitter and everything. Like you said, Twitter’s the number one spot for fintwit guys and girls. But part of it is that, like you said, a lot of people built up their reputation there in the Twitter space. Then if they then open their fund or they get inflows into their fund because of the presence they built on Twitter, and then later on compliance and just running the business gets so heavy that, like you said, you start pulling back from Twitter.
Jason Buck:
A bit of it feels a little bit disingenuous, but it also, is it disingenuous? Do you really owe anybody anything? Everybody feels like a lot of times I’ve seen a lot of other people’s DMs and people think you owe them something, even though it’s a free platform. But how do you think about that pull back? Do you feel like the pull of, even though I’m running a larger fund now, I still should be on Twitter more?
Kris Sidial:
Yeah. I see a couple of sides with it because there’s a lot of kids there that I think about that were in the same position as I was when I was trying to get my first job on Wall Street and going through the processes that they went through and being able to talk with with other traders. I enjoy that communication. I enjoy communicating with another guy who has a couple of bucks in his family account and he’s just looking at a new way to think about things. Not the investment advice, but here’s how you should think about risk. You don’t want to be risking to 20% on one trade or a thesis that you read on Zero Hedge. I enjoy helping and engaging with people like that. So I do feel bad in the sense that I can’t fully … and man, my message requests are just like, I’m not even exaggerating, it’s thousands. Thousands.
Jason Buck:
I’ve seen them. I’ve seen them.
Kris Sidial:
It’s crazy, crazy. Not even my messages. Just the messages requests. So if anybody tried to reach out to me guys and you don’t hear from me, I apologize because I really don’t mean to miss those messages, but it’s just, there’s no way for me to even keep up with them. So I do feel bad that I can’t openly be out there like that. But at the same time, if our attorneys say, “Look, you can’t be saying that or this and that,” my hands are tied there.
Jason Buck:
It’s really hard because you’re one person and I’ve seen the amount of message requests you get. It’s insane to me. But then part of it too is there’s a lot of good. Like you said, you could help out young guys on the come up. Give them just a little point. Not that you’d give them advice, just kind of pointers here or there. Or we get great DMs with other managers or even on Twitter, somebody, you can find an expert in any space and they can really school you on Twitter of like actually what are the details of that space that you would never even think of. But then at time, you can’t taste the sweet without the bitter. And the bitter side is you got people attacking the cut of your fade, that you need a haircut. It’s just an absolute chaos. So it’s just hard to deal with on a just volume basis.
Kris Sidial:
Man, I heard like some people are just really crazy with some of the claims too. Like somebody, one person even said that he’s like, “The Bloombergs that he has is fake.” Dude, you could just pull up, you could just click on Bloomberg ID. You’ll see my name pop up. It’s registered under my name. You know what I mean? Some of the things, man, that you have with some people on there. It could be a little ridiculous.
Kris Sidial:
Chris Cole is a mutual friend of ours. That’s the dude who had to go through the ringer because so many people just … Chris Cole had a lot of good stuff that he put out on Twitter. He would talk about things and he got to a point where this guy was just like, “Yeah, screw it. I don’t want to be engaged in Twitter anymore.” I feel like that’s a disservice because so many people told this guy who’s a very intelligent dude with a lot of good thoughts to put out. You trolled him to a point he just said, “Screw it, I’ll just be to myself.” So, it’s a balancing act with silly little things like that.
Jason Buck:
Well, and like you said, if you already have an established fund, it’s not really a net benefit to be on Twitter. We would want Chris to be on there, but I’m always like, “Why would you be on there?” There’s not really a point for him to be on there. Do you think also because of your age, you think you’re easily more easily able to handle Twitter? I think about me, I like to think I have thick skin, but I’m also a sensitive artist underneath and it’s brutal on a daily basis. But do you feel like you just grew up with just that chaos and so it’s easier for you to have thicker skin or just shrug it off when everybody goes on the attack?
Kris Sidial:
Man, trust me. I think I’ve went through so much more than that in my life that those little type of things just don’t, they don’t really affect me. Especially when some of it is just like, “Damn bro, you didn’t even do your due diligence well enough.” Like the Bloomberg thing, right? Oh, I don’t have a Bloomberg? You know what I mean? It’s pointless claims and stuff like that people will have on Twitter. So no, none of those things really, really stage me or affect me. A couple of times I’ve actually laughed at some of the things people have said, but yeah, it’s-
Jason Buck:
But like you said, if you know yourself and it’s so outside the realm, it’s funny, and you’re like, “Actually, that’s pretty funny. That’s a good joke.” Because you know yourself. But I’m wondering sometimes there might be something that just touches off that part that is maybe a insecurity you have. So maybe then that night you’re out there rolling with your jujitsu partners and they’re tapping and you might be pulling a little too hard or it’s affecting you on that subconscious level.
Kris Sidial:
No man. Unfortunately, or I guess fortunately, I have not experienced any of that to a point where it really upsets me or anything like that. I think for the most part, most of the people on Twitter are really kind and have good, positive things. It upsets me when I see people just trolling people for no reason. It can be a little embarrassing too, because I see like, there’s a couple guys who are way older than I am and I know they stalk my page to try to come and troll me. I’m like, “Dude, you’re an old guy. Go hang out with your wife. Go hang out with, with your kids.” Coming here trying to antagonize a younger dude. I can’t see myself in that situation where I’m an older dude trying to antagonize some younger guy.
Kris Sidial:
Or even sometimes people antagonize other people on there and I’m like, “Hey, you shouldn’t talk to this person like that. That’s somebody’s grandfather. That’s somebody’s husband. That’s somebody’s wife.” So I hate when I see some of the trolling and the disrespect that goes on on Twitter to that extent. Like I said, for me there’s not much that people could do that really upset me on that front. But when I see it for other people, I feel bad because I’m just like, “This is somebody’s grandfather you’re going to try to shit on.” You know what I mean? Like, come on man. Give this a guy break.
Jason Buck:
It reminds me, I think I heard Grant William say something, talking about Biden. He’s like, “You just reminds me … I just want to give him a hug. Poor guy. I’ll just give him a hug and I’ll show him off stage, not yell at him and think he’s the evil.” But you say that, but now that makes me, next time I’m in town, I’m going to survey your training partner to see what days you end up taking out a little bit of aggression on them. Maybe it’s up days, down days, or what’s going on in your Twitter space. But part of that though, let’s talk about that for a second. Maybe that’s why you’re able to shrug it off so well because you train so hard. Let’s talk about MMA, weight lifting, is that how like if you go a few days without training, do you find yourself a little more on edge?
Kris Sidial:
I definitely need to train at least once a week with the MMA stuff. I think that it’s, and other jujitsu guys can attest that is, but it’s that weird sense that it brings you in where nothing matters at that point. It doesn’t matter, well, how much money did we make. It doesn’t matter what school you went to. It doesn’t matter what’s going on in your social life, with your family. None of that matters. The only thing that matters and your brain just locks all of those things out, is just handling this guy in front of me, who is competitively trying to kill me. Not obviously, but competitively trying to harm me.
Kris Sidial:
I think this puts you in this weird zone which I never get because throughout the day we’re trading, we’re managing risk. We’re trying to see new trade opportunities. We’re trying to optimize trading strategies. We’re getting back to investors. We’re talking to our attorneys. We’re talking to our own families with things like, “Hey, can you bring home some fish tonight or some bread tonight” or something like that. You’re juggling all these sorts of things. But when you get into that environment, it’s a complete block off for an hour and a half straight. I can’t even fathom that because I’m just thinking about putting my hand here or moving my hand there or positioning myself or what this guy’s next move is going to be. And when you come out of there, you feel so relaxed and mentally at ease. It’s almost like a big reset. So yeah, I think that’s one of those things.
Kris Sidial:
And jujitsu is very, very, very in line with trading and markets, with humbling yourself, being open to having no ego and accepting losses. You and I have been talking about, well, mentally, how does a trader handle a drawdown period? If you’re a newer trader, you’ll probably struggle with those sorts of things. But if you’ve been trading for eight, 10 years or so, you’ve experienced draw down on periods. It’s just the nature of it. You have no ego towards it because you understand the system works, the edge works, it’s just a part of the edge not working. I manage risk and I move accordingly and I have no ego. I have no ego. I have no opinion. I do what markets say. It’s the same thing with jujitsu. I have no ego. I’m going to follow the move accordingly. I’m going to be accepting if I’m losing. I think all these life lessons come in into one, and this is where I’m becoming like a hippie in a sense, because jujitsu and trading. But jujitsu practitioner and guys who have done the sport and are traders, they can attest for that as well.
Jason Buck:
Shout out to Sal. One day, Sal and I are slowly turning into a hippie with all of our crazy hippie ideas around the fringes. It remind me of years ago I was having coffee with Ben Eifert and Chris Abdo Macia and my partner Taylor, and we were talking about … I was talking to Ben about kids. I was like, “I don’t have kids, but I don’t know how to shut my brain down from business. I wake up in the middle of the night thinking about portfolios. I wake up in the morning thinking about portfolios. I go to bed thinking about portfolios. I have to unfortunately listen to podcasts just to try to fall asleep. All I do is work 24/7. That’s all I think about.” I was like, “I don’t know how to shut my brain down.” But then it made me think, like you just said with jujitsu, maybe I need to get back into BJJ or something because you can’t think about anything else.
Jason Buck:
It makes me think of even, and I don’t know why it’s just long vol guys. I’m sure it’s across a lot of businesses. Maybe long vol guys are better at figuring it out. But you have Ben Eifert is a cyclist that’s climbing those hills of the South Bay where it’s so painful you can’t think about anything else except for your lactic acid threshold. You’ve got Vanir Bensalis flying helicopters. Chris Coles, a rock climber. Bastian Bolesta is an ice climber in Switzerland. You’re doing MMA training. So yeah, maybe that’s it. You need something that’s so harrowing. Well, you’re probably the smartest because you have constrained death is on the line, but it’s more of like a pseudo survivalship bias. Maybe that’s the smartest one. Although, have you been to clients meetings with a black eye or a little cauliflower ear or a wonky-ish arm or anything like that yet?
Kris Sidial:
So, obviously you know about the jaw thing. Have you guys see me ever clicking my jaw? That’s because I got hit a while back and my jaw is just weird. That’s from boxing actually. But yeah, there’s a couple times I had a little bit of a black mark right here. I’m trying to think there was recently something too that may be a little bit messed up, but it’s nothing too extreme. I always make sure I wear a mouth guard. It’s my biggest fear is losing my teeth. If I go with a knocked out teeth, oh man, investors would not like that. at prior firms where I worked at too, and I did this, it’s not that they had a problem with it, but you could tell some of the older MDs are always like, “Do you think you should be doing that? Let’s go play golf or something like that.”
Jason Buck:
Well, I mean, golf would be actually just as worse. Because it wasn’t, to me, it’s not about your pretty face getting injured. To me it’s more like if you really tweak your lower back, how badly is that going to affect your trading? Because subconsciously you’re worried about your back. But same thing with golf, somebody could tweak their back. That’s what I’d be more worried about. If you’re in constant pain and you’re trying to trade your book and I’m your allocator, it’s like, man, how much is this affecting his trading abilities?
Kris Sidial:
That’s actually a good way to look at it as well.
Jason Buck:
And you couldn’t use the model of your back pain allegedly teaches you how to trade and what positions to get out of because you’d just be in permanent back pain, so that wouldn’t be helpful.
Jason Buck:
The other thing you referenced though, you said, as you’re in this trading business, you have to learn to be very Zen about trading and you have to be very agnostic about draw downs, noise in markets, up, down, et cetera, because you have a long term process and you know what you’re doing. And that’s one thing when you have your own book, whether you’re trading your personal capital, which is sometime hard for people to do, or you’re at an institution and you’re trading internal capital at the bank like you used to do. I’m just curious now, that’s one thing to say and you’re trading your book, but now you have clients, and clients are constantly calling you and sometimes asking for updates or not happy with performance or whatever. But you know it’s part of the process and it’s part of the longer term outlook you have. So now, you have this third order effect though, of clients affecting the way you’re maybe thinking about. You have to make sure it doesn’t affect your trading process, but it can be brutal at times to get those calls during and around trading hours.
Kris Sidial:
Yeah, absolutely. That’s one of those things where, so just to open up the kimono and like I said, we’re two guys talking. We could talk about this. Last year was a year that my partners and I … and actually this is, this is a true fact. I’m not sure if you even know this, but you could go back and you could check the numbers. But we haven’t charged any clients any sort of management fee. We have not charged clients any management fee. Last year, our business was fully supported by our training. That’s a point blank period. We made money and this is not in the vol side of the business. This is private fund. We made money in that side of the business to support the business as a whole.
Kris Sidial:
So we understand as traders how to go out there, how do you make money. But throughout the time, you will go through periods of draw downs. Last year was a year that we had a solid year. Our trading on that standpoint this year more so slightly down to flattish. Psychologically, I think with other traders who are inexperienced in that front, they could be in a panic because they’re like, “Oh man, I’m drawing down. We’re getting this launch. We have more assets under management.” But it’s one of those things that you just have to reassure yourself that, “Listen, I’ve been here a million times. I know the process. This happened in 2013. This happened in 2015. This happened in 2017. It’s just the process.”
Kris Sidial:
And you’re right. If you have investors who are non-understanding towards that, like an investor who may say … I’m just throwing out numbers here. Imagine a guy, you have a guy who’s trading bad for seven, eight months. That’s a small timeframe. If you look at a real long track record in a person, you’ll see sometimes guys go year and a half, two years where they’re trading poorly and then-
Jason Buck:
But they might not even be trading poorly. Their strategy might be out of vogue too. It might not even be just they’re still trading well. It’s just not a target rich environment for them.
Kris Sidial:
Correct. Correct. There’s all these sorts of things that play in. So when an investor is making a decision as to how they should invest or who they should invest with, you’ve really got to be behind the manager themselves as well and understanding, “Okay, this is a thesis. This is what they’re foreseeing.” Because three months of checking out a track record, six months of checking a track record, that may not be fully representative of how the trader is, how the manager is. So with us, we never let that be a problem. Thankfully for us, we don’t have bad investors. We think all of our investor bases is really solid. They understand. They are investors that understand, hey, the market has not crashed you. If you’re running some sort of long vol or vol arc profile, most likely you’re going to have some sort of negative carry.
Kris Sidial:
It’s understanding if you’re down 20% or something like that. That’s where it’s like, “Whoa, man, you’re not doing your job.” But if you’re having that slight lead, that’s all within the realm of the understanding. So I think it’s a symbiotic relationship with the manager understanding what the client’s expectations are. And then also the client understanding what they’re investing in with the managers. Like I said, thankfully, we have not had any problems on that front with managers complaining or anything like that. Because I think the investors that we bring in are more on the sophisticated side and they understand that A, if the S&P is up 21%, you guys are probably going to be down to flat and most likely down. But we keep that in a safe boundary, more along the lines of down five, down seven, and not down 30. That’s fair play.
Kris Sidial:
So, I think it’s one of those things where it could be tough for a manager if you’re getting that prompt from the investors, but as you always say, we have to fire the investor. We manager has to find the investor because it’s true. It could be tough to operate like that. The manager has to have that ability to operate and the investor needs to trust the manager in that process to say, “Listen, I’m with you guys for this reason and I’m going to let you operate in that functionality.” But if it becomes a point where, you know a red flag when you see one, if a guy is swinging down, plus minus 30% in a product that’s not designed that way, then of course, you should be inquisitive towards it. But I think that’s an interesting point that you brought up and it’s one of those things that gets overlooked quite often.
Jason Buck:
Like you said, I always reference you want to fire your clients. And what I mean by that is you don’t want hot money. You want to find somebody that understands what you do, takes the time to understand you, they’re philosophically aligned to what you do, so hopefully they can stick around for the long term and you both have a symbiotic, good relationship. But everybody thinks they just want money. They just want AUM. So they’ll take all the money and then they’re surprised when they have these inflows and outflows and they have problem clients and it’s like, yeah, you didn’t take to educate your client and to actually to vet your client. Everybody thinks they’re there just to vet you as a manager, but you should be vetting them as a client to make sure it’s a good client for you.
Jason Buck:
It reminds me of I was talking to Jerry Hayworth about sometimes if they roll out a new fund. Capital allocators think they’re very smart and sophisticated and everything. But we always talk about they’re actually just trend followers or performance chasers too. Because Jerry’s been around since the 80s and 90s. He has a reputation. If he’s rolling on a new fund and puts the philosophy together and he teaches you about the entire philosophy, capital allocators will then go, “Well, we’ll wait two years to see how your performance is.” And it’s like, how does that make any sense? If the performance up down, it’s more based on the market, not the philosophy. You either believe in what he does and it makes sense to you as far as an allocation of your book or you’re just a performance chaser anyway. And so, I’m sure you get it all the time. It’s like, “You guys are a new fund. We’ll see how you do for the first two to three years.”
Kris Sidial:
It could be a little bit of a slap in the face too when you get that, because it’s like, “Okay, so has everything that I’ve done in my career as a trader prior to that not matter at all?” Being a part of a team at BMO, being part of a small hedge fund trading prop, then learning under a guy who is pretty renowned at the CBOE. None of that matters. It’s just the next four years matter. Then after you guys have a four-year track record, that’s what matters. I think those are one of those things where the older generation is more designed to think that way. But as the millennials inherit that type of control, you will see that less and less because people will understand.
Kris Sidial:
I mean, think of the crypto thing. You had a lot of smart guys that were going out there and taking their shot in crypto. The couple of Jane Street guys. Guys that ran books over at a real quant vol shop. You’re going to tell me that you want to wait to see a two- or three-year track record for individuals like that? These sorts of things don’t really make sense. I agree with your way of thinking about it as well is, “Well, do you believe in the process? Do you believe in the thesis?” If so, that’s more so that matters. Because we could talk about the time ensemble not matching the actual ensemble all day long. So it’s around the organicity and going down that path, but it’s really true. It’s like, “Well, you’re with the manager for seven months. What does that really show?” Because you could exit with that manager at month eight, and they could return 700% in the next two years.
Kris Sidial:
So yeah, it’s important for the investor to believe in the thesis and the process more so than just, “Well, are you guys up immediately?” If you’re running absolute return, things of that sort.
Jason Buck:
If I’m going to be sympathetic or still on allocators, I mean, obviously it’s really important to do a deep dive due diligence, and hopefully they’re doing that. But what I’ve found a lot of times is it’s a performative due diligence of checking box and they have all of these parameters that maybe that person in the seat wasn’t part of. They just came into an endowment or pension. But a lot of them have these little things like “in business for two years,” “running more than a hundred million,” “is your allocation size going to be more than 5% of the fund?” All of these things do not mean anything for due diligence, but these are the check boxes that we see in the industry. Like you said, hopefully that’s changing and people actually take the time to educate themselves on what the manager’s doing versus just checking the box to make sure that’s their performative due diligence.
Jason Buck:
Then, what you said about crypto, I find it fascinating. I just couldn’t help but the last time I was in New York, the takeaway I had from a lot of our conversations, like you, Darren and Ewen was like, a lot of time, edge is something that can’t be explained or expressed. By the time you can run a beautiful back test to it and by the time it’s out in academic papers, the edge has already been armed away. And so, it’s really odd to explain, especially crypto’s a good example of that, is like if you have a trading strategy you think is going to work and you can explain it well, and people will show me a five-year back test, that’s just not going to happen. And so, I just wonder, how many of that …
Jason Buck:
Well, having those concepts will preclude you from finding edge. I remember talking to Ewen about CTAs in the 1970s. Those guys were swashbuckling cowboys back then and everybody thought they were lunatic. Even using like moving average crossovers, that was like voodoo and the new stuff, and everybody’s like, “Show me a back test.” They’re like, “We can’t produce one.” Yet they performed amazingly well. Then you have all the academic papers and everybody comes behind into the back test, and by that time the returns have come down because they’re essentially getting armed away to like a normalized return. I’m curious, how do you think about that?
Kris Sidial:
I mean, that’s it right there. You nailed it. It doesn’t even need to go deeper.
Jason Buck:
And I’m done.
Kris Sidial:
It’s really true. One thing on the prop side that you learn that I’m extremely grateful for getting this in my career is all these small capacity constraint strategies that have edges. The things that, and obviously I don’t want to come out and fully talk about it, but you and I have spoken about some of these things on the side, some of these strategies are really good strategies that a lot of people overlook. One, because you don’t care to partake in them; or two, they don’t have the .. it doesn’t make sense. If you’re running a multi-billion dollar fund, you’re not going to be in something that’s going to be dry liquidity on something you’re running intra-day where you’re just going to kind of struggle to get in and out. Whereas, if you’re a $250 million fund, well, I could partake in that all day, and if I could make two to three to five basis points a day running these capacity constraint, true type strategies, these are really good edges that lie in the market out there. A lot of times people are overlooking them or step over them.
Kris Sidial:
The market will always have that. Every market will always have these type of capacity constraints, really core strategies. And to be honest, these are the best type of strategies that investors, if they understood the full spectrum, it will pump, because you’re doing it, that is zero beta uncorrelated to S&P completely and it’s a true return stream. So I agree with that. You shouldn’t always go off of the back test or try to pull too much from the back test because at that point in time, it’s late.
Kris Sidial:
And if you have been trading markets long enough, there are some things that conceptually make sense. My partner Will, he sometimes will talk about something conceptually. Well, did you this because of this, this, and this, and does this make sense? Just from training, we understand that, yeah, that could work. Going through the back test process and collecting the data and going through that could literally take a whole year. Do we want to wait a whole year to roll the strategy out? Or could we say, “Okay, risk one basis point on this and let’s start to track this, and then let’s start to size accordingly if the trade makes sense.” Well, so we’ll put it through a phase one, phase two, phase three production test, and we’ll go about it in that manner, as opposed to saying, “Well, let’s go through a full quant back test where we’re going to say, let’s collect the data, let’s go through stage one testing.” Some of the things don’t really make sense so I’m in agreement with that.
Jason Buck:
But you guys have put in the reps, so you almost see it subconsciously. Because I know you even will tweet about it all the time. It’s like reading the tape, right? If you guys are constantly watching the markets and you’re constantly in that seat just staring at your Bloomberg screen, is you guys will see anomalies in the trade you do and that will remind you of something from five, six, seven, 10 years ago. And you go, this is an opportunity here that we can take advantage of before this window closes. There’s no way of proving it. You just know from putting in the reps. And so, that’s one way. There’s multiple ways, right? You have whole trading strategies that may not have a back test. You have anomalies that pop up from reading the tape. Sorry, you were going to say something before I go on to the third one.
Kris Sidial:
No, no, go ahead. Go ahead. You’re good.
Jason Buck:
This one is maybe maybe further field, but I think about it, I was reminded of the philosophy of ick. Oh, you probably never heard this one, but forgive me for a second. I’m laughing because I know where my head’s going on this. There’s philosophers that talk about things that … they literally call it the philosophy of ick. Ick being gross. The idea of like, if you had sex with a raw chicken and then you cleaned it and cooked it and ate it, is there anything wrong with that or is it just a philosophy of ick? Or if you had sex with one of your relatives, but you both were on birth control, is that wrong or is that just the philosophy of ick?
Jason Buck:
I know I’m taking it to an uncomfortable place, but the reason I said that is to get back to like, if somebody like you is portrayed in dispersion trades and you are trading some single name equities, it’s interesting how an institutional dispersion trader might never touch mean stocks, because it’s a philosophy of ick. They won’t be able to explain that to their allocators and they think they’re so sophisticated that they’re too good to touch those stocks. So it’s almost like a philosophy of ick where you’re just agnostic and are like, “I’ll trade what makes money” and so you get to opportunities that people would be surprised that institutional traders won’t touch.
Kris Sidial:
For sure. This is why I enjoy talking with some of the guys that are the good retail traders like Darren Johnson, Tyler Kling. These guys bring me back to that more so older space because on the institutional side, you get bogged down with this whole quant process as well. Sometimes that could convolute your thoughts to realize that there’s a lot of easy money that’s out there in certain areas that have these dislocations, but nobody wants to pick it up. So the pure academic type will lift their nose at these type of strategies and these type of opportunities out there. But it’s like, why wouldn’t I take that? Why wouldn’t I put that trade on? Why wouldn’t I think about this process?
Kris Sidial:
It’s an ego thing, too. This goes back to the jujitsu thing and the trader thing. Me personally, some of the best traders that I’ve known have been guys that are ex-prop guys that have built up a huge bank role that are now kind of just retail. Some of the guys on this sell side and I’m sure sell side guys will admit this too, they suck as traders because they don’t have a true edge. They don’t think about markets in that manner.
Kris Sidial:
Sometime buy side guys too can be obviously really good traders, but some of them can be more so just data-driven and structure-focused. Not pure alpha, just I’m in the right place, the right time, running the right trade structure. Long only momentum guys over the last decade or so, cool, those guys have performed insanely well. Is that trader skill or is that a byproduct of the fact that it’s correlated to equities drifting up? These are all these sorts of things that you could think of.
Kris Sidial:
So I think the guys that were ex-prop guys that turned retail guys understand how to think about unconventional edges and make that process a way to have a living. It’s one of those things where I’m more surprised too, that people don’t think in that manner about being the guy at the poker table in AC at 1:00 AM. Why wouldn’t you want to just make easy money?
Kris Sidial:
There was was a trader way back in the day. This is 2013. He had this really stupid saying, but it stuck with me. It was just like, why would I want to sit there and fight Floyd Mayweather when I could just kick an old lady’s cane over?It’s really raw, but seriously, why am I going to sit there and be so caught up? That’s why when I see guys on Twitter that get super bogged down in the esoteric vol stuff, some of the things that we do, I’m like, man, you’re not running a vol book. If I was, and again, full disclaimer, if I was just out there to try to make money like the thing that we do on the side with the side fund, the majority of it does not come from these dispersion or vol trades.
Kris Sidial:
It’s just really simple edges that are out there in the market that I can just take advantage of and be a retail guy with a smaller account. He could do that all day long and pad your account all day long. That’s why you hear about these stories. Some of it is nonsense. But you do hear some stories about retail guys turning little amounts of money into large sums and consistently doing it for years because of the process is correct, because the edge is there. So I think it’s an ego thing with a lot of these guys who don’t want to participate in these areas.
Jason Buck:
Also to clarify, like you said, you’ve seen retail guys turned into large sums, but it then consistently, usually is capacity constraint. But they’re still just clipping off a huge coupon. That’s what people miss, is like there’s ways. I mean, it’s hard to find so it’s not that easy, but there’s ways that retail does have an advantage. We’re saying is like, the ego thing with institutional side, and I think that’s what we’re both highlighting is people have no idea a lot of times that a lot of institutional trading, you would think it’s about your PnL, it’s black and white. Did I make money? Am I the best at this?
Jason Buck:
But no, there’s all these other constraints and looking good and all that other stuff that affect the institutional traders. But you’re saying retail can without those constraints can have really interesting trades? They’re also going to have different time horizons and they can play in these capacity constraint spaces where you might build a small nest egg or bankroll up to 10 million bucks, and your capacity is constrained 10 million bucks. But you have 10 million bucks that’s clipping off $5 million a year in returns. That’s a great living. But that’s what’s out there.
Kris Sidial:
My partner Will, he’s a big example of this. This is the reason why when we were putting together end results, Sal’s excited to work directly with Will. Sal’s ex-Citadel, ex-Morgan Stanley so we’ll exclude him. Obviously, I have a background from the institutional side as well. But Will has just been a pure independent trader. This is somebody that I definitely wanted to be on my team because of the ability to think that way. To think about, “Okay, I know and I understand how to make seven figures a year consistently. I know how to do that.” Low seven figures because some of these strategies are capacity constrained. But as a trader, which an independent trader which he was, he came to the table every day, understood edges, understood dislocations, and made that amount of money to support him and his family every single day consistently.
Kris Sidial:
But if you’re on the institutional side, you’ll get that guy who, when a dislocation occurs or when things go wrong, they don’t have that same trader psyche. So they’ll be sitting there showing you, “This is what the data says. Follow the data, follow the data.” And what we were talking about, this is where the relative value spreads are breaking and things are going haywire, and he’s telling me revert this strategy, we’re having a disagreement about this because conceptually he doesn’t understand the core root of edges and dislocations and real trading, what it’s like to be out there. But a guy like Will who puts it on the line every day and understands these dislocations will say, “I’m not getting in front of this RV break because this could be some guy in Asia that’s just completely blowing through the line.”
Kris Sidial:
This mentality is what I think or what I know makes good managers and good traders. That’s why, internally we have that nice mix. I like to believe that we have that nice mix because it’s not just some quant who’s sitting there and just reading off numbers. It’s like, we know and we understand the process, how to generate alpha, how to manage risk, how to think about portfolio construction, and to merge all these things in to go out there and trade. Not just think in this uniform manner that if the data says this, just do that and to, and that’s the end of deal, which you’ll get, what most, probably, definitely over 50% of the institutional guys.
Kris Sidial:
That’s why you hear about some of these large blowups and you look at them and you’re like, “Well, why were you nakedly shorting a low float small cap stock, and are you so surprised that you blew up on that?” Well, of course that was going to happen. You didn’t think that could go up 300%, 400%. Why? There’s the outstanding shares are seven million outstanding shares, and then people are upset that they lost their money. But it’s the manager didn’t come from that background to generate out, but he came from the background where “I got to wear the suit, I got to wear the tie, I’ll come in the office at this time, and he’s worked his way up the corporate ladder well enough to now go and manage a fund.” But what’s on paper, which looks all polished and clean, is not truly representative as to the trader that the person is.
Jason Buck:
Right. But in fairness, they’re smarter than we are because we should have been short vol guys because you just blow up a short vol book, you call it a black swan event, everybody lost and then you just spin up a new fund and you just keep doing that over and over again, right?
Kris Sidial:
Exactly. Exactly.
Jason Buck:
So we’re the idiots in this scenario. I’m not sure how much we can get this in the podcast, but it is one thing you and I haven’t spent much time talking about so I want to dig into the VXX Barclays issue with the ETN. It looks like at the end of the day it was more of a legal snafu than anything else. Obviously we can’t talk numbers, but you guys were on the right side of that trade. You had a very nice expansion in PNL during that period.
Jason Buck:
But I’m curious, in hindsight, you know, after that trade doesn’t keep expanding, everybody’s going to come back to you and be like, “Why didn’t you monetize it?” To me, that’s not your position. You’re swinging for the fences in that scenario and so that’s what I want you to do. But at the same time, I know traders that are well-known hedge fund guys, that during the Fallmageddon of February, 2018, they were the ones calling for that to happen. Then, they were looking for it to extend and expand, and they got caught in the mean reversion side of that too, and they didn’t have great PnL’s because it didn’t expand the way they want to.
Jason Buck:
I’m just curious, how you guys talked about that internally or how you thought about that trade as you started to get some really outsized expansion of your PnL from it. Did you think about at least trenching out some of that and banking some of that profit or you were there like, “No, this is where we can make really outsized returns,” where a lot of people in hindsight where hindsight’s 20/20, they’d be like, “Oh man, I wish you would’ve booked that because then it would been a positive PnL for the year and you could have just went on vacation.”
Kris Sidial:
Oh, yeah, I would do that every single time. I would do that the exact way that we acted. If you give me a million scenarios, I would act the same way in a million scenarios. Because this is played out a million times. I’ve seen this literally a million times. It may not be in the same name and the same profile and everything, but when you’re thinking about monetization process in your forward forecast, it’s all the same. So it goes back to us thinking about what the mandate of the business is. For us, if we have an investor that is in the business, they’re not with us to make 12%. I’ll tell you right now and I’m sure you guys aren’t with us to make 12% too, right? As an investor, you’re not with us to make 12%.
Kris Sidial:
One thing that we did differently when we started this business was we said that we want to bring a product that when the dislocation occurs, we’re going to shoot the lights out. It’s not 20%. It’s not 30%. It’s not 50%. We want to be plus 2X, 3X, 4X. We want to carry that exposure. Now, the trade off to that is, well, if you’re going to carry that much exposure in front of the term structure, you’re going to bleed. So you’re going to have to do things that are uncorrelated to SAP falls and manage that bleed and make sure that you stay afloat so you’re not bleeding out 20-30% on an annual base.
Kris Sidial:
So the way how we look at it is, well, what is our job as a firm and are we honoring that mandate? When we saw the books skipped up like that, we looked at the potential distribution as to what could potentially happen. And we said, cool, we could lock in a very tiny amount for the sake of trading. This is trading 101. You go up on a position, you lock some of it in no matter what. But what are we waiting for going forward? It didn’t give us what we were looking for at that moment so there was no action. We viewed that the same way a million times over because one day you will get that move, and then, the same way how … and none of our investors said anything to us about this or were saying, “Hey, you should have locked in 13% or anything like that.”
Kris Sidial:
Because again, I think everybody who’s with us understands the mandate of the firm, and that’s really the core focus. Because when that day comes, you don’t want to be like, “Here’s 30%.” Because they’re going to look at it and be like, “Well, wait, hold on. Shouldn’t you have made 400%?” “Yeah, but I was aggressively locking it in.” I’d rather give it all back if I’m up 12, 15, 20% or so, based on the understanding that what the investor base is there for is not that. They are there for it outsize.
Kris Sidial:
This is the investor’s understanding as to what they’re putting their money towards too. Are you looking for something that is going to return 12% on those type of dislocate? Are you looking to make 12% when the equity market is down 5%? Well, we’re not going to be the product for you. That’s just flat out. I tell that to potential investors all the time. If you’re looking for a product that is going to track the S&P one for one, that’s not us. We carry a Comex profile that’s looking to outperform during those real moments of market stress. As a trader, I would take that same trade, that same process, all day long, because out of one of those coin tosses, it’s going to turn up our way. And when it does turn up our way, that outsize return is going to be enough to cover exponential amount of the times that we missed in not taking that.
Jason Buck:
Years’ worth. And you don’t know if that’s the straw that’s going to break the camel’s back too. This is the dislocation where it starts and this is where you guys really monetize that PnL. You said like, none of your investors said anything to you, but they did say things to me behind your back. But none of them were bad. It’s like, you know you educate people, but it’s always like, “But damn, I would’ve taken that in hindsight. That would’ve been a nice positive carry for the year.” But that’s always in hindsight and they were joking about that.
Jason Buck:
But it actually remind me of when Soros broke the Bank of England. But people don’t know a lot of times what they’d forget is he was up 40% on that year. He had open PnL of positive 40% and he basically bet upwards of 40-50%. So he was like, “Look, if I totally blow this trade up, I’m down 10% on the year.” He was willing to risk that plus 40 open PnL on this year just to make that huge trade where he netted know over a billion dollars. It’s just interesting, like you said, you’re willing to risk that open PnL to have exponential returns.
Kris Sidial:
That’s trading 101. A part of that is monetizing in tears. I’m the first one to complain and be like, “You got to monetize. You got to monetize.” But you don’t want to monetize too early in the move to a point where you’re cutting off the potential convexity. That’s something that we just was not going to do. So yeah, sure, you monetize a smidge of it, but that wasn’t the area to monetize the bulk of the move, one third of the move, or one half. This just the way I guess we look at it. 50 plus percent, sure, locking a third. Those are one of those situations where you lock in a third and you say, “Okay, where are we comfortable with locking in the other third lock?” Or, and then, “Where are we comfortable locking in the final third lot? Where are we comfortable getting out the entirety of the trade if it goes against this?”
Kris Sidial:
But it didn’t move to that fashion to make us interested. And like I said, I’ve seen this a million times. I’ve seen throughout my career trading, I’ve seen this a million times. It’s not the first time you saw a dislocation that had some sort of a anomaly event. It’s the same process that works over the course of a full market cycle. When you let those outsized winners take weight, it really does amazing things for the overall portfolio.
Jason Buck:
Perfect. It’s been a long trading day so I appreciate you getting on to record a podcast. I’m going to say my hardest question is my final question, because I’m sure after you leave here, you’re going to go get a workout in. And this holds for me, this is the conundrum I’m always dealing with is like, no matter how much we work out and monetize all of our genetic gifts, how does it feel that you’ll never be as handsome as Corey Hoffstein?
Kris Sidial:
Man, that guy’s pretty hot, I will say. Hoffstein’s probably listened to this. I’m just cracking up right now. Mr. Hoffstein, he is the Adonis of finance for sure. If you guys are listening to this, I’m sure everybody who listens to this knows Corey Hoffstein. But if you do not know Corey Hoffstein, just Google him and you will see a Calvin Klein model. But he is actually a quant nerd in the finance realm. But yeah, Hoffstein’s a pretty good-looking dude, man. I don’t know.
Jason Buck:
I wonder, I think he grew up an ugly duckling and then he’s made his way into these runway model good looks. And so, like you said, obviously his podcast is phenomenal and you are amazing on his podcast. Then just for context, I think Corey’s six foot four. I’m five, nine and you’re five, five. So, that’s why.
Kris Sidial:
Don’t listen. I’m not five, five. Do not listen to this man.
Jason Buck:
If they Google images of you online, you look like Prince leaning up against the wall. You got your high heel boots on and you’re really stretching for that five, six like Bruno Mars style.
Kris Sidial:
If you guys look up … Bloomberg did this article on me. If you guys look up the article and you see that picture, I look really short. I assure you, I’m not that short in real life. I’m not tiny like with that picture. But yes, standing next to Hoffstein would probably make me look really, really short like I’m five, seven or five, six or so.
Jason Buck:
What do you claim?
Kris Sidial:
This guy? What do you claim?
Jason Buck:
Well, how do you claim? Because I’ve been with you in real life. What do you claim?
Kris Sidial:
I mean, dude, I claim what is on the driver’s license. This is five, ten.
Jason Buck:
All right. I’ll give you that. I think you’re stretching up. You’re probably like me, five, nine and a half and you round it up.
Kris Sidial:
Oh, man. Oh, man.
Jason Buck:
That’s the perfect place for an ending man. Thanks for coming on. I look forward to doing this again in the future.
Kris Sidial:
Absolutely, brother. Thank you very much.
Taylor Pearson:
Thanks for listening. If you enjoyed today’s show, we’d appreciate if you would share this show with friends and leave us a review on iTunes as it helps more listeners find the show and join our amazing community. To those of you who already shared or left a review, thank you very sincerely. It does mean a lot to us. If you’d like more information about Mutiny Fund, you can go to mutinyfund.com. For any thoughts on how we can improve this show or questions about anything we’ve talked about here on the podcast today, drop us a message via email I’m taylor@mutinyfund.com; and Jason is jason@mutinyfund.com. Or you can reach us on Twitter. I’m @TaylorPearsonME and Jason is @JasonMutiny. To hear about new episodes or get our monthly newsletter with reading recommendations, sign up at mutinyfund.com/newsletter.
