Trading Skill Isn’t Enough to Run a Hedge Fund | Benn Eifert of QVR Advisors
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Before we get started, I want to do a quick disclaimer that nothing we say here is investment advice. Nothing we say is marketing or advertising for QVR advisors or any of their funds or products. Everything is meant to be informative about the fund management industry. Welcome to another edition of Other People's Money. I am joined today by Ben Eifert, the managing partner at QVR Advisors, a San Francisco-based investment manager that focuses on derivatives and absolute return strategies. Thank you so much for joining me today, Ben.

Max, thanks for having me. It's great to be here. Well, everyone is very excited to have you back on Twitter. Whether you are in the derivatives world, which is most of what you post about, but you seem to attract attention from everybody. Perhaps that is because derivatives are sort of eating the world, and maybe that's something we can get into today. But this is really about your success building QVR into now, I don't know what AUM has reached, but I know you've crossed over a billion dollars, certainly a major milestone for success in the mines industry.

hedge fund managers everywhere. So congratulations on that. I know it has been a long road and you posted a thread that actually was the impetus for this discussion, talking about why a lot of the skills that people associate with a great hedge fund manager, being a great trader, thinking about risk are not quite the skills that you need to actually be a successful hedge fund manager. So

So why don't we start there with that thread? You know, what are the skills that make a great trader and why isn't that enough? So first of all, of course, you need to be a great trader and portfolio manager and risk manager to start and run a hedge fund. That's crucial first and foremost. But yeah, I think the genesis of that thread, you know, folks were talking a little bit about, you know, the exodus of prop traders from Wall Street and trying to form their own hedge funds and, you know, some of the issues around that. And that's really, I think, what brought this up.

you know when you think about um you know your classic wall street prop trader or a lot of the you know the best traders and portfolio managers that you see um you know a lot of times temperamentally they're very aggressive and forceful uh they're single-minded and they're focused on markets you know which is great when you're trying to make money um but they don't always necessarily have the best interpersonal skills they're not necessarily the best at understanding what's going on all around them to enable them to do what they do

or managing people to implement all those support functions.

Good results are obviously critically important to this business. But even to get to the point where you can get those good results, right, when you're thinking about this process, oh, you know, I think I want to start a hedge fund. I mean, there's so much that you have to do and achieve before you can ever make your first dollar of P&L for investors, right? I mean, you have to set up legal entities for management companies and funds. You have to negotiate prime brokerage agreements. You have to set up HR and payroll systems.

You got to set up cybersecurity and IT policies and systems and business insurance. I mean, you got to implement order management systems, which, you know, you just usually sit down at the desk and all that stuff is there, right? And trading systems and risk systems. You got to set up daily trade position and cash reconciliation across all accounts. That's just stuff that there's somebody on a different floor that does when you work for the big bank, right?

You have to set up risk management frameworks and policies that, you know, not only work for you, but also are transparent and convincing to investors and for people to buy into, you know, your business, right? You got to be able to customize risk management features to fit clients reporting needs and what they need to represent to their clients that, you know, this makes sense.

You got to write and enforce a compliance program, reporting requirements around for the SEC. You got to be able to explain to non-specialist investors that don't necessarily come from the same background that you do or your boss used to what it is that you do in a compelling way.

You set up a CRM, a client, you know, a relationship management system, manage a marketing process, showcase stability and consistency. There's so many things that your typical high end portfolio manager just doesn't have experience of, right? Has never had to deal with. There's always somebody else who had to deal with that.

And a lot of the time, again, the typical PM or big shot trader doesn't necessarily have the temperament to naturally sort of gravitate towards those things. Right. They're not natural managers and sort of project managers. They're sort of natural doers.

You know, the PM has to be able to hire experienced non-investment staff to lead those efforts, but at the same time needs to be closely involved in making sure that they are done in a way that meets the needs of the investment process. Right. We'll talk about this more, but it's not as simple as, oh, you just sort of hire people for all that and then it's dealt with. Right.

And inevitably, a lot of it falls on the PM. I mean, you think about like designing the risk systems that you're going to use as a PM. When you think about closing investments like that falls on the PM, nobody else ultimately at the end of the day.

Nobody's going to understand the risk system that fits with your strategy. Maybe the operations people that you hire came from an investment role. I mean, people do make that switch from front office to back office. They say, I'm done with this, the lucky monkey contest. I think I'd rather try and add some value there. But I guess it begs the question, I mean, you were a bank prop trader in a prior life. So are you just...

you know, the survivorship bias? Or did you, you know, think that you had these skills going into it? Did you recognize maybe some differences in your in your personality compared to the other bank traders that you were around? I'm sure there's a little bit, at least a little bit of survivorship bias. You always have to admit that, right? There's always a little bit of luck plays into everything. But I do think, you know, a few things, you know, from the

When you think about the investor side and education, I came from an academic background and I really liked teaching in the master's in financial engineering program. And I really, I think, naturally gravitate towards explaining things and enjoy that. That's mostly what I do on Twitter. I mean, I don't... We'll talk about this later. I mean, I don't think of Twitter as like a marketing thing at all. I just sort of talk about things that are interesting that I care about and like that people find them useful. I'm not a very sharp-elbowed person. I don't, you know...

I think I don't fit the typical sort of prop trader mold in that regard. I like working with people. I like building trust with the team and having people work with me and do things for me because they like me, not because they're afraid of me. And I think that that sort of helps. But, you know, ultimately, when when I started QVR, I had some very, very good partners and then I've continued to add more very, very good partners who are totally instrumental to

you know, making the business work and, you know, giving them the rope that they need to do what they have to do to make the business work, but also being happily involved with them in anything that they need and understanding what they're trying to do. Um, and I think it's finding that, that balance, you know, where you're both hiring really good people and delegating to them, but also not just treating it. Everything is their problem, sort of being willing to help on everything, um, where your, your view as the PM is really important.

I think that gets the job done. You sort of ask, you know, why? That's another thing that we talk about a lot. I mean, I think many managers are probably better off ultimately at a multi-strat or something, right, where they just plug and play, certainly from a pure economics perspective. I think, you know, our case is a little bit, you know, we do something very, very niche-y that makes, you know, that there's a good value proposition for and it's highly differentiated, you know, on a standalone basis. You know, that makes sense. And also, I think,

you know, we have a lot of different capabilities to do different kinds of things for different investors and be entrepreneurial about the business.

You know, so we do we have our absolute return type of strategies that look like hedge fund strategies, but we also do customized tail risk hedging type of mandates for large investors. And we do you know, we think of all the various things we could do in the future. And those kind of things that you can't do that in a multistrat, right? In a multistrat, you sort of sit down and you manage the hedge fund assets for your boss. And that's it. You can't necessarily be entrepreneurial about this. And so that was something we really wanted to do.

What are the questions you should be asking yourself if you're fortunate enough to have this choice between going to work as a multi-strat as a PM and starting your own hedge fund is a great choice to have? Yeah.

But if you are at that crossroads, I mean, there's the temperament. Do you have the right temperament for this? But what about demand? You talked about having a niche strategy. Sometimes that's great because there's no competition, but also you have to educate the allocators sort of from start to finish. So what are the questions you need to ask yourself to decide on that crossroads? I think there's several different things. So one really important one is...

What's your patience level and kind of trade off between, you know, long term and short term? I mean, ultimately, even if you have both choices with a few very rare exceptions, it's going to take a lot longer to get to scale starting your own firm than it is at a multistrat. So if you join a multistrat and, you know, you're well known and, you know, the big boss at Millennium or Citadel likes you, you're going to have a lot of risk capital very quickly. If you do well, you're going to get a lot more risk capital very quickly.

generally at a hedge fund, you know, you're going to have your anchor investors who are helping you start your firm. And then most of the time, again, there are exceptions to this where you're incredibly famous and well known, but most of the time it's going to be three years

where everybody watches you and says, look, you're a brand new firm. That's great. We're excited for you. Come back when you have a three or four year track record and then we'll take you seriously. Right. And then somewhere along the road, obviously, you try to start really marketing and you start getting your story out and you do your best. But it's a much longer, slower process to scale. Again, in the outside of those the Rokos type of phenomenon. Thank you.

Um, so that's really important. You know, you have to be up for the marketing task, right? That's sort of critical when you're, when you're in a multistrat or on a bank prop desk, which don't really exist anymore. You have one boss and your job is to make them and their bosses and your job is to make them happy. And mostly that's about making money. Um, and you know, have not losing too much money and you don't tip it. You have to do a little education, but usually your boss, you know, knows what you do and is pretty smart.

and probably sat in your seat 10 years ago. When you're setting out to really build your own firm, you have to be ready, especially if you're in a little bit of a niche area where investors maybe aren't that familiar, you have to be ready to take investors at whatever starting point that they're comfortable with. And they're not going to be typically former specialists in your strategy area as a PM. So you have to commit to taking the time to build the relationship, increase the client's knowledge base,

Your average asset owner looks at a lot of different kinds of strategies and has to understand how you fit into their mental framework, how you fit into their portfolio, really understand how you make money and what kind of risks you take. And it's incumbent on the PM ultimately to convey that knowledge in an interesting and convincing way. Right. And so if you're not up for that over and over and over again for years on end as a big part, as a part of your job, you're really going to want to gravitate more in the multi-strat direction.

There are really big benefits of that when you go that route, though, because ultimately, if you build really good client relationships, running your own firm, people really believe in what you do. They really trust you. Money is really sticky. One problem people bring up in multistrats is to their credit, multistrats are very good at managing the risk of their overall portfolio by cutting capital to managers who are losing money quite fast or firing managers who are losing quite fast.

Arguably, if you're an independent manager that has really strong investor relationships, people who really believe in you, you can weather drawdowns a lot better. People want to know why you're down. They want to understand. They want to understand what the opportunities are, especially if you're in a strategy where typically you're drawing down because there are big dislocations that are getting bigger and something's getting weirder and crazier in markets, but also presenting a really good opportunity.

You can explain that to people and they trust you and they believe in you and maybe they give you more capital in that environment as opposed to cutting your capital kind of mechanically from a risk management standpoint. So there are some real benefits also. And those relationships that you're talking about, I mean, a lot of people, they go out, they do put up three, four years of strong performance and they still aren't able to get in front of allocators. Is it starting off with sort of like A primes on day one so that their cap intro aspect is...

Getting you in front of people? Is it having those relationships going in because you had a great seat at another big firm and you got maybe in front of these investors? How do you start to have those relationships? So I think when you're starting the firm, it's really critical to have a few of those relationships already. You're not going to make it sort of without it.

it. There is sort of the traditional seeding route where you get kind of a hedge fund seeder that still exists, but it's much smaller than it used to be. Typically, a lot of the firms that are getting started, you're getting started because you have one or two or three really good investor relationships with people who say, look, we really want you to manage our money, you know, start a firm and we'll hold the business and operational risk. We're willing to put that up with you. Maybe they want a good fee deal in exchange and it makes sense for everybody. Without those kind of relationships, it's very hard to get started.

Really, to be totally honest, after that, ultimately, it's just about running a very sort of disciplined process. So, you know, it's not that hard to get introductions as if you're a reasonable scale. It's different if you're running $15 million in your garage doing longshore deck, right? But if you're a manager that got started with $100 or $200 million from some well-known investors and you're relatively well-known and...

you're speaking at conferences and eventually you're going to some cap intro events you're not going to have a problem at like the top you know just getting introductions to people to talk to generally speaking um i think the the big thing and this is where i think a lot of people go wrong um and i can speak you know more from my experience as a niche manager this is going to come from a derivatives perspective not necessarily like a long short equity perspective but um

There's, I think, a prevailing idea of what marketing looks like in hedge fund land where you're supposed to hire kind of a senior marketer and a marketer is somebody who says, look, I've got I came from Goldman Sachs. I was a sales guy. I've got this Rolodex. I know a lot of people. I'm going to raise you a lot of money. Right. And.

by and large, I would say that isn't actually a thing. Right. Well, it used to, it was a thing 15 years ago, uh, back when hedge fund allocation was much less of an institutionalized process. Back when you were raising money from wealthy individuals, you know, people knew people that they played golf with and they would just go raise you some money. The money, the amount of money involved was smaller. It was more of a thing now. Um,

honestly that you know your typical investor is going to be an endowment that's going to take two years from when they first started talking to you to make that decision and like a warm introduction is nice but honestly you're going to have 25 meetings with them and only the very first one is where that sales guy got you the introduction and it just doesn't matter that much right the thing that matters is having a really really good process right and very boring stuff so like

Having all of the people that you're talking to in your CRM and following up with them really regularly, knowing who's on first base, who's on second base, who's on third base, who's on fourth base, who needs to be have what follow up every day, who is has asked for something that you need to get for them, who is who has asked questions that you need to get answered.

Who do you need to get the PM in front of? Because it's the right time to talk to the PM and never dropping the ball and just rigor, you know, pushing sort of all these people slowly through the funnel until they start to convert months or years down the line. Right. And that's hard work and discipline being really salesy and having a great elevator pitch. I mean, it's it's nice, but it's not we'll get the done. Ultimately, the PM does the does the real selling in the end. Anyway, that's who the investors want to talk with.

to really understand the strategy to close the deal. And the role of business development is to be all those things that a PM can't, right? Not to sort of have the slickest sales pitch. And I think that's where a lot of people go wrong. They take sort of the wrong approach to hiring in business development. They kind of get somebody who says they're going to raise a bunch of money and underperforms. And what about filling the CRM? Obviously, most hedge funds, there are new

There are new regulations that allow you to do a bit more general solicitation, but most funds go the route that you're not allowed to generally solicit. So how are you even filling the CRM to start with? For us, again, this will be a little bit from a derivatives perspective. I think it's a little different if you're long-short equity, but we're wanting a relatively filtered set of investors to start with. So our starting point isn't let's just get the universe of everybody who invests with hedge funds.

Because again, we do relatively niche derivative stuff. Somebody who isn't that interested in derivatives in the first place and doesn't have much experience with it is just very unlikely to invest with us. So it doesn't make sense for us to spend our time on that.

So we really look to generate inbound inquiry, right? So we work with a variety of cap intro teams on the street, maybe a few third party cap intro that hold conferences or something where you go and meet investors that where there's a mutual interest rate where it's not just random sort of speed dating, but it's like these people actually requested, looked at your profile and requested to meet you.

We do regular industry conferences where like I'll give talks or somebody else will give a talk and generate some interest and, you know, meet people that will want to get in touch with us. There's lots of word of mouth. So, you know, our investors talk to other investors and, you know, we get introductions that way. Again, this isn't the purpose at all of me on Twitter, but I am on Twitter. I talk a lot about investing. I talk a lot about derivatives. I don't talk at all about QVR really specifically or what we do or try to market us, but people...

get, you know, note some of that content. We write research papers and try to generate interesting content and kind of get that out there. And that combination of stuff generates enough sort of filtered, interested inbound inquiry that is worth us pursuing with our, you know, limited resources. The last guest I had on used a phrase, the water finds its level.

And I think that with social media, so many people are focused on like, how do I get my specific brand out there and my strategy and that going out there, adding value, being yourself, being relatable makes people say, what does this guy do? And then they go in through the formal channels. It's not that they've gotten the QVR pitch.

But they've gotten to understand who Ben is and how he thinks about the world and how he treats people and how holistically you think about your business, maybe. I think that's exactly right. And it's a very, it's not, again, not really something that I planned. It's just sort of how it evolves. But thinking about it, I mean, I really like the approach. Like, I'm just myself on social media. I don't, as is very obvious, I say exactly what I think I want.

talk about a lot of different things. I talk about my kids. I talk about politics. I talk about, you know, whatever video games that I'm playing. And I'm not out there sort of trying to do a QVR sales pitch from a compliance perspective. I wouldn't want to anyway, but like, that's not what I'm, what I'm interested in doing on social media. It's not sort of a LinkedIn thing where you're sort of trying to put the fact sheet up there and sort of everybody look at it, right? My approach is just to try to generate, to do fun and interesting content, to get people interested, to teach people stuff and,

If that generates, you know, interest for QVR, like that's super. That's not, you know, why I'm doing it, but it does tend to do that. You know, there are a reasonable number of senior asset owner types on Twitter who don't necessarily talk a lot or post a lot, but who are just kind of there reading things and listening to things. And you hear about it later, or maybe they DM you, you know, private message you or something like that.

Now, there is no Elden Ring sort of like Alligator Mafia. There are a few, actually. There's definitely a few investors that I talk with regularly about what they're up to in Elden Ring. It helps to have interest, too, because so many people who are in this field, like they eat, sleep and breathe markets. And not that you can't find success. I mean, so many of the most successful hedge fund managers famously have that sort of personality. But there are plenty of people out there who want to do business with like a normal guy.

Yeah, no, I think that's right. What about the databases? I mean, reporting to databases sort of like on day one, another manager who I spoke to had a very strong track record said, you know, you'd be amazed how many people out there are just every month running screens for their type of like return profile, what they consider to be good performance and that they will find you too if you just consistently put up the numbers. I think that's right too. You know, we report to some of the databases. I think we're in a few of the indexes, things like that. And we do occasionally get

inbound interest from there, you know, things like frequent, like every once in a while, somebody will come in having found us on, on one of those systems or in one, in one of those databases running their screens and everything. So, yeah, I think that's right. And I think that, you know, if you, if you put up, uh, you know, the kind of returns again, it's, um,

Something where we talked a little bit about the multi-managers and single manager funds, you really do have to show some differentiation and there really has to be something interesting there. But as long as you're doing that and somebody can see a compelling case for why a particular return stream might make sense, then they might want to find out more about it and what's driving it and whether it could make sense in their portfolio.

So as a single manager, what is differentiated to get somebody to say, I'm going to go with you versus going with a brand name? There's a few things. It's definitely, you know, strong competition in an uphill battle. I think there's a reason why, you know, the multi-strats have become so large and so dominant. In our case, being able to make reasonably consistent money in normal markets, but then really actually do very well in stressed markets when a lot of other strategies are struggling and becoming highly correlated. I think

people really view that very positively as an individual differentiator.

right um it's not just that i think these guys hopefully aren't going to lose money when things get bad but like exactly at the time when i need when i need it most in my portfolio like i think these guys actually have a good opportunity set and have a good chance of delivering i think that's a very good differentiator that people view as worth considering as a standalone inclusion you know in their in their portfolio and like most most allocators already have big portfolios right they already have lots of equity beta and they already have lots of things that

have a carry profile that make money in normal times but lose money in bad times. The thing that makes their portfolio better isn't adding more of that stuff. It's adding something that complements it, right? And I think that's where you can get a strong value proposition about actually really having a complimentary return stream. Another thing that I think we get very good feedback on

We are very, very transparent as a firm and as a portfolio that people can invest in. We give investors very detailed risk analytics and look into the kinds of positions and risk that we have. We are happy to talk about positions. We have some big managers that we have partnerships with where they really like certain trades that we're doing and they say, hey, can we have three times that position? Let's put it in this sort of side sleeve over here.

And so we're very open, very transparent, very willing to work with people in a way that I think a big multistrat obviously isn't going to be customizing things for investors or giving them real-time dashboards and stuff like that. So I think

That's a really good differentiator that a single manager can have, right? Just being very accessible, very transparent, very willing to work closely with investors. A lot of people, they have their commingled fund and they have, you know, 50 or 100 in that, but they have a big $200 million like SMA investor. How big is the customized solution and SMA side of

of where single manager assets are growing? It's actually, it's big and it's growing. So I would say the biggest and most sophisticated fund of funds and endowments often do want an SMA. Sometimes in the case of fund of funds, this was actually a whole other thread that I posted and talked about on Twitter, like

like the best remaining fund of funds, the fund of funds industry came under a lot of pressure after 2008, right? And it shrank a lot. It was like, look, you guys are just middlemen taking C's and then investing it in multi-strat or something, right? A lot of the best fund of funds that are left are running managed account platforms, right? So they're only working with you on a managed account basis. They're investing in a bunch of different funds with managed accounts, and they're treating that very much like a multi-strat platform, right? Where they have real-time view into risk across all their managers,

They have them in Cayman entities within the same PB, so they're getting cross-financing benefits across their different managers and netting positions and able to get really efficient financing. They're doing internal risk management and overlays and internal alpha generation on top of those portfolios.

And that starts to look a ton like the multi-strat platforms. And so again, that's going to be SMA only type of investments. Then anytime, of course, an investor wants something that's customized to them, that's going to be in an SMA, in a managed account or in a fund of one. And so you very much see that part of the business growing. We've had several SMAs and funds of one. There are operational considerations you obviously have to deal with. You have to deal with how you split trades and what kind of systems that you implement to manage these things. But it's all doable ultimately with the right infrastructure.

And it meets, you know, helps satisfy a lot of the demand out there for, again, more control from an asset owner perspective, more visibility, more transparency. And in some cases, like these multi-strat platforms within fund to funds, better products that can realistically compete with multi-strats out there.

So when somebody comes to you and they want something customized, do you have to already offer that? Are they willing to work with you, maybe pass through some of the expense to them to build out this infrastructure that they need to get what they want? Or is it you have to have it built first? Of course, if we're already doing something very much like what they want, then that's nice and that makes it easier. But if someone's doing something that we view as sensible, doable, they're

there's good reasons why we should be able to do it on our infrastructure and why we're the right kind of manager to be doing that. And maybe other people might want something similar at some point. Like we're very happy to put in the work and the effort to, you know, to build that out and to design it. And, you know, generally speaking, we don't expect

costs to be passed through of that process to us. Like, you know, we're going to do the research and the work and they're, you know, they're putting in time, you know, to want to write because you generally anytime that someone's coming to us and saying, look, we want to take really seriously evaluate the possibility of doing this thing with you. They're putting in a lot of work, too.

And so it's a two-way street. We're happy to do that. Now, what about expansion? Sometimes somebody comes to you and they say, I really like the strategy. Could you do it for us? That's great. But what about when you see opportunity as the market evolves? How do you think about launching strategies before the demand is really there? Within an absolute return perspective,

type of portfolio and hedge fund product and derivatives, you're sort of always doing that on a long horizon basis, right? So that you're always managing the existing strategies that you have, but you're always thinking about what new opportunities that there are, what things you aren't thinking about, doing some research and half of the time it doesn't work out and nothing comes of it. But some percentage of the time you've

you decide, hey, look, this really seems to make sense. Why don't we start doing this on a small scale within the coming of products that you already have within the absolute return products that you already have? And then if it goes well, scaling it up again, that's very similar, I think, to any firm that runs a variety of strategies and has a research process. Then sometimes there's an idea and either it's like idea driven or sometimes it's talent driven, right? Where you run into someone

who has a strategy that is really good and really interesting, fits what the firm does really well. And you think maybe it has a role either within those existing absolute return products, or maybe it actually should be its own product because maybe it has specific characteristics that people would be interested in on a standalone basis. And in those kind of cases, that's going to be opportunistically driven. But in those kind of cases,

um we'll absolutely you know look at doing something like that steve ritchie recently joined us a little while ago he's a fantastic super experienced guy the qvr team has known for a really long time

He was available and opportunistically we brought him in to run a new index volatility strategy that's new for us, but for him he's been managing for a really, really long time. We brought him in along with Todd Miller. So Todd had hired Steve into First Quadrant in 1997. They designed the First Quadrant Volatility Alpha program way back when.

And an evolution of that is now what we call QVR convexity alpha. They had actually hired our business development guys, Scott Medell, into first quadrant in 2005. So we all go way, way, way back.

It was a perfect opportunity where he was available. He had the strategy that really fit TBR's infrastructure and our philosophy and our way of doing things. And our investors really liked what he was doing and were happy to back what he was doing and others will in the future too. So that kind of thing, that's a very natural way for us to expand.

And what do you have to offer to somebody like that who has the pedigree that probably could have gone out on his own and had success, you know, launching this strategy? What do you have to give to them on day one? Economics, infrastructure, like to make it easier for them to make this choice to go with you. It's kind of the same set of questions about, you know, do you want to do you want to try to start your own your own fund? Right. Where?

He certainly could have tried to go that route. But it's a hell of a lot of work. And you know, there's a whole lot of stuff that he would have to do that he doesn't necessarily want to want to do. And we can give him really good infrastructure that's tailored and customized to exactly what he does. You know, we have marketing that again, is very specialized in derivatives oriented strategies that and in this case, you know, again, Scott Maydell and Steve was was Scott's boss for years and years. So like they work really well together, obviously.

And so everything just naturally works really well already, rather than having to go and build it all from scratch and, you know, figure out what to do. Right. So and of course, of course, there's other kinds of platforms that, you know, would have loved to add Steve to. But we're a good value proposition, again, because he has a long history with us. And and it's a very specialized firm as opposed to going to some more general multi-strat where, you know, you're kind of the weird guy in the corner as opposed to, you know, it makes perfect sense why you're doing this here.

So I want to ask a question. Have we reached peak pod? What is your outlook for the industry moving forward? That's a great question. So I don't know. It's always hard to sort of call the exact top right of any of any move like this. I do think we've we've probably gone a bit too far. And the reason I say that, I think it.

I think it's a great business model and it delivers a lot of value to investors and it makes a ton of sense in a lot of different ways. But I think you've seen the growth of AUM explode so incredibly fast over the last five, seven years. And you've seen as a result of that, I think one yellow flag, I don't know if it's a red flag, but one yellow flag is you've seen

The multi-manager platforms really move out of what's historically been their sweet spot of relatively liquid strategies where they can have PMs who they can easily, you know, cover the risk of the PM. If they don't like it, they can, you know, fire the PM or cut the PM's capital very easily to the downside and not have any kind of issues come up with that. They can manage the risk really, really easily. You've started to see a lot of hiring of business

distressed credit, levered loans, SPACs, all kinds of, uh, all kinds of areas that historically are very illiquid, very difficult to get out of the positions, very non-transparent, not really risk that you can manage by sort of like doing some hedging trades on top of it. And I think ultimately if you, if you have enough of that kind of stuff concentrated, when you have a big economic downturn and you have a big credit cycle and you have real liquidity crises,

There's really no trades that they can do on top from a risk management perspective to prevent that stuff. I mean, think about like financing risk and like synthetic cash basis and how levered loans and crappy convertible bonds and distressed debt trades down to a huge basis relative to credit default swaps in a crisis because of funding risk and liquidity risk. And you can't hedge that. Right.

So I think that there is a real possibility, you know, at some point we're going to have a major risk off cycle, we're going to have a credit cycle. And I don't know that those platforms are going to be as robust as they would have been like five years ago to that cycle because they've expanded so fast in order to support that AUM. They've gotten into a lot of strategies that are sort of hard to risk manage in those kind of events. So I think, you know, that's a possibility that we could see.

I'm sure they're totally aware of that. I'm sure they're not going to blow up the firms, but I think that again, that could lead to some significant underperformance relative to how you've seen people do in, you know, in some of these smaller crisis events recently. Let's talk about the relative performance in a year like 2024. Equity markets do very, very well. Of course, the Bloomberg sort of like return table screenshots go around and a lot of people who, whether they're in the business or not, comment like, who would buy this thing? Yeah.

You talk to allocators all the time. You have a great understanding of what they're looking for. What's your view on that question? If you're a high-end multistrat and you're putting up mid-teens returns on pretty low volatility with very low drawdowns in crisis environments and you're doing that year after year, like,

That's tremendous. And people love that. And people are absolutely willing to pay tons of fees for that. The S&P has done better than mid-teens returns, you know, a lot of recent years. But people don't view that as a guarantee by any means. The idea that, you know, you look back at even 2020, right? So 2020 turned out to be not a horrible year in the end, but it was pretty choppy in the interim, right? And you think about the worst moments of March 2020, when everybody is panicking about COVID,

You had global equity markets down 30% in a flash.

There was actually a lot of people pointing fingers at multistrats and saying, oh, these guys are in trouble. Most of the multistrat platforms were down like low to mid single digits at the worst point and then snapped back and most of them ended the month of March up. That performance relative to equity markets is exactly what the whole point is. This is a well-managed, diversified return stream from a lot of different sources with good centralized risk management. And it's not necessarily going to keep up with equities in a monster year, but it's going to put up

probably more on average than you expect equities to put up in an average year with better risk management. That's a great value proposition. I'm not a multi-strand guy, but I give lots of credibility to that performance. What about the other side of the coin? What about the single managers? I mean, it's been tough going for them. Fewer and fewer seem to be making it. They seem to keep launching. The tough environment seems not to have deterred people from launching single manager funds.

Where do you see that side of the business going? I think it has been tough. Much of the shrinkage has come from things that probably shouldn't exist. Like when you have hedge funds that are kind of beta heavy index tracking, you know, equity vehicles that track that, you know, have 70 or 80 percent correlation with the S&P and charge relatively high fees. Like there's no real reason for that to exist. Right. And so it makes sense to see those categories just shrinking really fast and going away.

Of course, you're really looking for those really differentiated managers where there's a reason why they're standalone, why they can put up returns that make sense in a portfolio context. Again, aren't necessarily outperforming the S&P all the time or whatever, but that makes sense in a portfolio context for allocators. That's really what the single manager world is going to have to evolve into, right, is

real specialists that are very differentiated, that have a very good reason to exist on a standalone basis, that are entrepreneurial and maybe have a variety of different products and services that they can offer to investors. You're going to see, I think, continued more involvement with managers that have hedge fund products, but also have mutual funds or ETFs, like that kind of thing, where they can use their skill set

And the fact that they have an infrastructure and a standalone business platform to launch different kinds of products that make sense using their expertise. I mean, I think that's kind of where we're going to continue to go.

And what about the rise of derivative strategies in ETFs? I wouldn't go so far as to say they're competing with you, but types of strategies that derivative managers like you would maybe employ in a private fund are making their way into publicly listed funds a lot more these days. There's been a huge rise in the use of derivatives in publicly listed funds, both mutual funds and ETFs now. There are a variety of themes there. You don't usually see things that are

like literally, oh, this is actually like a hedge fund absolute return strategy that somebody just put it in ETF. That I don't, you don't see very much. But what you do see is, you know, a tremendous amount of simple option selling and yield types of products. So those are very, very, very popular. You see a very big takeoff of what are called buffer ETFs that are essentially doing like an equity exposure with a collar attached. Mm-hmm.

And that's, you know, there have been mutual funds that are very popular with that type of structure. So people talk a lot about the JP Morgan collar fund that's super, super famous and humongous size. So you're seeing more and more of this type of thing. You're seeing leveraged ETFs that are using options to achieve their leverage. And so these, you know, these products are really, really growing. They certainly don't compete with like the core part of our business, but

I think that there are some good ideas there. The problem is always inevitably that the public funds industry, for better or for worse, is very kind of distribution focused and distribution oriented, right? So success in getting your product off the ground is much less about like the quality of the product and much more about the platform that it's on and the distribution army that's behind it and people kind of hitting the road in Florida and getting retirees sort of into the product. SunTrust baby.

Yeah, exactly. I think what that meant is the first generation of a lot of those products aren't necessarily very thoughtful. They've gotten to very big size, but the execution is very mechanical. And so you run into a lot of problems where you have a huge fund that's doing totally transparent trade in giant size in derivatives markets that everybody knows about in advance. And so there's all kinds of issues of

you know, opportunistic positioning and or front running around, you know, the trades that those funds have to do. There's all kinds of issues around, you know, what the quality of execution that those that those funds really get is.

And I think in a stressed market environment, those issues will become much larger because we live in a world where there's very good liquidity in general in derivatives markets, like on the screen, on the exchange, when there's lots of volume going through, but banks don't have nearly the risk tolerance that they used to, to take down really big trades on a risk capital allocation basis, especially in stressed markets. And the second that we hit a major

problem in markets and you really see liquidity dry up, like what's going to happen when $10 billion of assets in buffer ETF funds have to go and roll these like absolutely enormous collar positions that are deep in the money and illiquid and absolutely no market maker wants to take down this huge balance sheet risk, right? I think it's going to be a legitimate problem. So much of the expansion of these strategies into publicly listed funds is marketed as democratization of asset

of access. And my question, you know, a lot of times, like there are people who have run strategies before that they fit a very specific need for an allocator. And then they say, I want to democratize access to this. And it's like, well, that

strategy you were running was tailored to this person with a very specific need. Do you think when you see democratization thrown around at the end of a strategy that has historically been a private strategy, does that make your antenna go up? Yeah.

It does. So that word, the use of that word, democracy is great. But when usually when people are going around marketing something as like democratization of this thing that that only these very special people have access to you and now you sort of you, the retail investor have access to, that's a big red flag that usually they're sort of trying to, you know, sell you on something and market something to you that isn't necessarily appropriate. And

probably isn't actually the same quality as the thing that, you know, they're talking about the, you know, pre democratization. And I think you see that in all kinds of things. You see that in, you know, people trying to, to, to market private equity stakes to retail investors. And you see, you know, you see that all over the place. So I think, I think that's right. I think, you know, generally speaking, options and derivatives is a complicated space. It's not something that

that most people who just have a job and are busy and hard specialists should really be trying to get involved in at all. Even if they kind of watch markets and think that they're interested and involved, there's just too many risks and too many things that you might not understand and ways for you to get screwed.

And I think that, you know, this is no exception. You think of like a covered call ECF or something, you know, it's not going to be some catastrophically risky thing that has all this secret tail risk that's actually going to blow up on you and destroy you, you know, the way that some other things are. But also there's just a lot of subtleties there. Usually they're marketed in very simplistic ways that aren't actually the right way to think about the strategy, right? So there's

There's how do you market this to retail investors? Will you just say, well, you already own the stock. So it's just like being willing to sell the stock if it goes up 10%. So wouldn't you want to get paid to do that? So, oh, it's total. It's free money. And people toss around these kind of statements. And then you look at the data and they may underperform and they underperform and they underperform because they're very heavily crowded. There's tons and tons of selling of the same thing at a price that doesn't make sense. There's a lot of transaction costs.

You know, they're getting a front run, all this kind of stuff, you know, things that just as a regular person, you're going to have a very difficult, have a very difficult time doing due diligence on and really understanding in advance what you're getting. I've heard it talked about with like put writing, you know, cash secured put writing. It's like, well, I'm willing to own the stock if it's down, down here. And it's like, well, usually if it's down there, there's a reason. And it's not because of the information you have today. Yeah, exactly. No, there's a lot of that very misleading, you know, marketing efforts around those kind of strategies. And it's not that it's like it's ever,

It's never the right thing to do to sell a put. There are times that may make sense to sell a put, but you got to actually think about it properly. And it's certainly the right way to think about that. It's not that I would want to buy the stock down there. So I should just sell this put. It doesn't matter what the price of the put is. That's crazy. What are these sorts of new products, new entrants, what are they doing to markets that you at QVR are excited about as an opportunity?

So really what we think about at QVR first and foremost isn't predicting the direction of markets or making big directional bets. We're interested in where are there dislocations in derivatives markets that come from big size flows that are usually sort of non-economic flows or not driven by sophisticated investors.

where there's too many people selling the same thing or buying the same thing in a price insensitive way that pushes prices out of line in a way that doesn't make sense. And then what can we do about that to kind of take the other side in a hedged risk controlled kind of way to find a way to make money? So that's how we think about the world. And so inevitably, whenever you have

very large scale herding into, say, mutual fund and ETF products that do covered call writing in the same area of the volatility surface, short dated options in index, for example. That's something that we're going to know about. We're going to think about, we're going to track, we're going to see the impact of that in pricing. You're going to see the thing that all these people are selling get too cheap. You're going to see the term structure between there and further out the curve get too steep.

And we're going to be thinking about what strategies do we want that would buy the type of thing that they're selling, be on the other side of those ETFs, and then hedging with something else that's more expensive. Whenever there are

These kind of themes, whenever there's a dislocation in markets that's driven by whether it's things that corporations are doing, things that retail investors are doing, things that hedges are doing, we're going to be tracking it. We're going to be identifying the price impact and thinking about how to monetize that. I guess my final question is, when is the next Volmageddon? When is the next big spike? That's what everybody wants to know.

Yeah. So it's always, you know, it's always hard to know when there's going to be a big ball spike. Now, Balmageddon, you know, you mentioned that one of the most interesting things about Balmageddon

Wasn't that there happened to be a big vol spike in February of 18, but it was that, you know, the whole vol community knew and understood that there were very specific microstructure issues in the market that were guaranteed to turn into some outsized vol spike, you know, if the right conditions happen. So in particular, there were these volatility exchange traded notes, ETMs, like, for example, XIB.

which had gotten very, very big and very, very popular and attracted a lot of investors that didn't know what they even were and didn't know what a VIX future was that were what they hold. And these were, you know, was an ETF that was short, kind of fully levered volatility in the short date of VIX futures. And that ETF would blow up and be liquidated and be worth zero if those futures doubled in any given day.

Which is a very bad design because it turns out it's actually not very hard for volatility to double off of a low base, right? So it's one thing if the VIX is already 60, it's hard for... If the VIX futures are 60, it's hard to get them to 120 in one day. Maybe if the market was down 50% or something. But if VIX futures are 10...

All you need is like a two and a half, three percent sell off to take them to 20. And that's going to actually destroy billions of dollars in the marketplace and just wreck and liquidate this whole fund. And by the way, nobody who owned that fund even knew that. Right. Or I say nobody, but a lot of people had no idea. And so that was something that derivatives managers talked about a lot and said, look, if we get a meaningful vol spike, it doesn't even have to double, actually, because the second it goes up 50 percent, everybody's going to get worried about this. They're going to front run the unwind of the ETF. Right.

I don't see anything quite like that in the market today where there's some really obvious product or microstructure issue that will create will very likely create some, you know, big explosion in volatility kind of mechanically if the S&P is down 3% or something.

But, you know, there are certainly with the Trump administration coming in, you know, people think about Trump as business friendly. I mean, maybe to some businesses, I don't know. But Trump is really like a chaos agent, right? I mean, he's not a sort of let's just be stable and kind of make sure the status quo is there for businesses to make money. He's going to come in and slap, you know, it appears he's going to slap big tariffs into the market that we've, you know, much bigger than we've ever seen. He's going to be, you know, deporting

deporting tons and tons and tons of immigrants and hitting whole areas of business really hard. You're going to be doing all kinds of stuff that's unpredictable. And he likes it that way. That's sort of what he does. And it's very much a recipe for volatility. Is anything in that list of things going to sure to send the VIX to 60 in a day? I don't really think so. But it's always very hard to predict when you get those kind of spikes. What you have to think about is what in the marketplace

What's going to happen if we get an unexpected series of events that lead to market volatility and downside? What are the accelerating factors are going to be? What areas of market positioning are likely to blow up or come under a lot of pressure and generate big short squeezes? And how do you position yourself so that you don't get blown up by that or that you can take advantage of that? Right.

Yeah, I think a lot of people forget like 2019, like the year of China trade talks, where it was like, every day there was a new headline like market sour on trade talks dissolving markets rip as trade talks resume, like it was

every day. And we're about to get that with tariffs. Yeah, I think that's exactly right. When you think about, you know, realized volatility, that's exactly what happens with this kind of policymaking, right? Where you just constantly kind of have surprises and bombs and leaks and oh my God, this is happening. Oh, it's not happening. Oh, it is happening. And that's how you get realized volatility. That's fun. So are you excited for this? I mean, some you talk about it as if people aren't ready for it. It sounds like you're licking your lips.

I think generally, it depends obviously on the nature of one's strategies. We're not a long volatility firm. Sometimes people think we are because we had a great 2020 or whatever. But the thing that most derivatives managers who do absolute return need is interesting opportunities, right? Things changing, volatility realizing, volatility of volatility realizing, opportunities being created, dislocations appearing and shifting and moving. And those kind of environments are generally good for that. We don't usually like

2017 like environments where every, you know, stocks just kind of go up. Volatility goes to zero. Everything's incredibly boring. There's no surprises of any kind that makes it harder to make money in this space unless you're doing things that you really shouldn't be and taking a ton of tail risk. All right, Ben, we'll leave it there. Thank you so much for joining us. Absolutely. It was a great time. Thanks.