The Compound and Friends
00:34:51 · Josh Brown, Michael Batnick, Alex Altmann
[00:34:51] S0: I don't know the answer. What's what's the what's the reason? [00:34:54] S2: Well, I think earlier in the year, it was energy. It was a lot of energy stocks going up when the market went down, and that was this weird negative beta effect. Yeah. And then it was interest rates. Right? Interest rates went up. Consumer staples got killed. REITs got killed. Utilities got killed. Mag Seven was, especially Apple, completely undeterred and Apple's biggest stock in the world. And then it was the software AI days. On, off, on, on, off. I think it's been it's been those three things. What else am I missing? [00:35:19] S1: So there... There's there's like a unified narrative that that basically puts all those together, and it goes back to our friends at, at RV Strategies relative value. Right? So if you think about, multi manager AUM in 2018, 2019 before COVID was around about $300,000,000,000, and today, it's, like, 1,000,000,000,000. [00:35:41] S0: Yeah. [00:35:42] S1: Yeah. Right? So it's basically tripled since COVID. And [00:35:45] S2: So who are talking about? Like, Citadel and and Millennium and those type of companies?
00:35:45 · Michael Batnick, Alex Altmann, Josh Brown
[00:35:45] S2: So who are talking about? Like, Citadel and and Millennium and those type of companies? [00:35:48] S1: Well, name names. Right. But but, you know, multi managers, pods, you know, the... Basically, guys where effectively their job is to isolate idiosyncratic alpha as opposed to be taking large directional bets. Right? So they'll encourage their managers to run high gross, low net exposure. And it makes sense. Right? Why why has there been explosion at AUM since COVID? Well, because... Well, really since 2022 when interest rates went up. And it's because in a high interest rate environment, RV strategies are absolute no brainers. Right? Because I deploy a load of gross on my long side, load of gross on my short side. I actually haven't redeployed a dollar unit, so to speak. I've got plenty of risk, but I take my actual capital haircut for collateral for my PB requirements. And then [00:36:28] S0: you're earning a spread, you're earning an interest rate on the rest. [00:36:30] S1: Correct. Yeah. Right? So whatever your collateral commitments are, let's say, 15% aside or whatever, but you're taking the 70% and you're earning that you're earning that 5%. You probably even get more than that in relatively safe. [00:36:41] S0: That's the low net part. You're offsetting with your longs and and your shorts, and then you're collecting an interest rate on whatever you don't have to allocate.
00:36:41 · Josh Brown, Alex Altmann, Michael Batnick
[00:36:41] S0: That's the low net part. You're offsetting with your longs and and your shorts, and then you're collecting an interest rate on whatever you don't have to allocate. [00:36:48] S1: Correct. And and because these businesses are run so... They're run so efficiently, that's why you're given very strict mandates on what your net exposures can be. Right? Because they... It's not you breaching some horrible limit. It's actually just because as a... As an organization, they want to sort of manage effectively the the... There's a treasury function, essentially. Yeah. And it's a very good business model. It's... You know, for for... And all you're doing is you're trying to isolate that idiosyncratic alpha. Now here's the catch. If everyone's doing it, right, it's not just a handful of funds. Right. Everyone's doing it. Everyone has access to the same risk parameter metrics, so they're neutralizing their value and their quality and their size and their growth and all the rest of it. They're also obviously neutralizing their sector exposures, and they're neutralizing their market exposure. But the number of stocks you can trade has shrunk. We talked about this deequatization already. Right? So [00:37:39] S0: They have, like, 3,000 stocks, basically. [00:37:41] S1: Right. And that number has gone down over time, not up. Yeah. Right? It's been started [00:37:45] S0: in the business with, like, 10,000. [00:37:46] S1: And it's net negative issuance [00:37:47] S2: Yeah.
00:37:47 · Michael Batnick, Alex Altmann, Josh Brown
[00:37:47] S2: Yeah. [00:37:48] S1: In the sense that we're having few... We've had fewer IPOs and more buybacks. So by definition, there's less available stock to trade. Right? So with those combination of factors plus the ballooning of AUM plus leverage from PBs on top, you end up with this crowding out effect. And everyone will say, oh, okay. Hang on a second. It doesn't matter because I've neutralized everything. No. All you've done is push the crowding into other aspects of your portfolio that you are either aware of or unaware of. Right? And this really matters because when you've ballooned the size of the number of strategies, so to speak, you're creating more of these vicious... The propensity for these vicious unwinds. [00:38:24] S0: So every... Everyone unwinds one aspect of a portfolio at once. It hits the stocks three times harder than it otherwise would have. [00:38:31] S1: Correct. Which is why you're seeing very little index vol and an absolute ton of factor vol, single vol, negative correlation. Yeah. [00:38:40] S2: And you see what the stocks that are like... Obviously, Spotify and Netflix are related ish, but for a year, it was the exact same chart, like, identical. And there's a million different stocks like that that trade... That just trade... They're just in the same basket of stocks that people are buying and selling.
00:38:40 · Michael Batnick, Alex Altmann, Josh Brown
[00:38:40] S2: And you see what the stocks that are like... Obviously, Spotify and Netflix are related ish, but for a year, it was the exact same chart, like, identical. And there's a million different stocks like that that trade... That just trade... They're just in the same basket of stocks that people are buying and selling. [00:38:56] S1: Correct. And and by the way, a lot of those people are actually just computers. Right? So you got obviously very sophisticated quant funds that are running sort of real time stat ARP strategies that are looking for the one day or even intraday, you know, price differential. They can play mean reversion. So there's those playing the super short term stuff. You've got the discretionary alpha guys, which are looking for time horizons I'm which is called... Let's call it three to six week, and that's generally on single stock pairs as well for mean reversion around earnings. That's why on earnings day, the majority of of a single stock flow is coming from discretionary. And then on non earnings day, vast majority is coming from quant and retail. [00:39:29] S0: In the media, people are looking at the preponderance of all of this data, and they're coming up with the story that explains it to non market participants who don't appreciate the degree to which this is computers trading with computers. [00:39:43] S1: Yep.
00:39:43 · Alex Altmann, Josh Brown
[00:39:43] S1: Yep. [00:39:43] S0: And it sort of remind... I taught I taught my my daughter... My daughter had a a unit, I remember, in elementary school. They were learning about Greek mythology. So she's, like, sitting reading this book. She's like, she can't make heads heads... Why are they giving us fairy tales to read? I said, you don't understand. This was science. Like, why does the sun rise in the East and set in the West? Oh, it's because Apollo on his chariot is being pulled across the sky, and he's glowing, and so that's the sun. Why is there an earthquake? The gods are mad. You did this. Why is there a volcano? Like, this is what humans do. They need... Even if it's absurd [00:40:24] S1: We have to [00:40:24] S0: explain they have to explain it. So in the media, they're looking at the net result of all this stat arb and everything that's happening. That's not a satisfying explanation. Why did the market change its mind about AI today is yes, and because, and then they find a headline that explains why it changed its mind. [00:40:44] S1: I mean, this is the shameless plug to to to, like, the team. You know? Like, the the whole point of why we exist is to kind of... We The bet... [00:40:52] S0: The bets [00:40:52] S1: team. Yeah. The bets team at Barclays. Like [00:40:54] S0: How many of of you are there? [00:40:56] S1: Globally, now we're 11. [00:40:57] S0: Okay. [00:40:58] S1: So we've got three in New York. We've got three in in London, and we've just hired additionally in Asia. So we've now [00:41:06] S0: got five So 11 people on the bets team?