When the Market Crashes… They Profit | Wayne Himelsein on Logica Capital’s Long Volatility Playbook
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Why are you getting short the very thing that you love, right? We all love vol because of when markets sell off, it spikes. It's the aggressive other side to equity sell-offs, right? When there's panic, vol lifts off like a rocket. Well, if that's why you want it, then you don't want to be short that.

Today's episode is brought to you by Fintool, the AI junior analyst tailored for institutional investors. Go to the Fintool.com link in the description to learn how you can add AI to your research process. Before we get started, I just want to do a quick disclaimer that nothing we say here is investment advice as well. Nothing we say is marketing or advertising for Logica or any of their funds. 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 Wayne Himmelsine, CIO of Logica Capital Advisors, a Los Angeles-based hedge fund manager focused primarily on derivative strategies exhibiting positive convexity and skew. Now, Wayne, I know you've been around since 2011, and a lot of the growth has come more recently with you crossing over $400 million in AUM.

But until 2015, you described the firm as being in the R&D stage. That's obviously very different than most funds where you're trying to start out with as big a seat as you can and covering the costs from management fees. So clearly that's not what you guys did. Can you talk to me about why you chose this very different path for Logic?

The easy answer is I had a big idea and it hadn't necessarily been done. And so I didn't want to go to market with something, I'll call it half-baked, right? And I didn't want to take that risk. Like if we're going to come out with something that's

fairly unique and different and hard to do, then it better be right or it better be good, so to speak. So with that in mind, we got going. I had a team of people, including a quant, another quant slash programmer, PhD, mathematician, and

some ops people and for the first several years, I mean, when you say 2011, we founded in December of 11. So it's effectively 2012. But from 2012 through 14, because we got going running some institutional capital as a risk overlay in January of 15. But so those first few years,

We're OK, we've got this idea of we want to be long vol only and long vol only meaning 100% gross long vol. Gross long convexity is incredibly unusual in the vol space. Most vol managers, traders, PMs, et cetera, or strategies, let's just say that, but most of all strategies carry long vol via short vol.

i.e. spreads, right? Whether, you know, there's so many different types of spreads out there. There's calendar spreads and moneyness spreads and there's selling index vol versus idiosyncratic vol buying, right? And so you buy something and you sell something and the thing you're selling is purportedly cheaper and the thing you want to be long is, is,

usually the tail for that ultimate convexity. And so these spreads are created across the vol surface or across positions. Sometimes there's basis risk, sometimes there's not. But the point being is that the spreads are created so that the short vol carry pays for the long vol. At the end of the day, everybody wants, right? So

I looked at that originally when I wanted to be on the vol side and I thought to myself, this makes no sense. When I say this makes no sense, I don't understand. You all want this thing

to be you all want to be long this but you're going to short it to belong it right it's a it was like counter thesis like why are you getting short the very thing that you love right we all love all because of when markets sell off it it spikes it's it's the aggressive other side to equity sell-offs right um when there's panic vol lifts off like a rocket well if that's why you want it then you don't want to be short that

Right. So it and the analogy I came up with in the very beginning, which is funny, but it's simple, is if you want to do the high jump, you don't put on a weight belt.

It's just that simple idea. And so when I said that to myself, then I'm like, well, nobody does this. So why does nobody do it? Because it's hard, right? Because it's how do you carry long vol and make money while you wait? There's theta, there's the bleed, which just eats you alive. It's death by a thousand cuts while you're waiting for these moments of payoff. And so

Going back to the original question is I'm like, OK, everybody does it this way. I want to do it differently because I don't want to be in a counter thesis trade. I want to only be long vol. Well, that's hard. Clearly, no one does it for the reason. So if I'm going to come out to the world and say, yeah, I'm doing something that nobody did before. Well, then I better have it down pat. And so that goes back to we needed several years to figure that out.

To answer your question, why do you sell it and then to go along the thing is so that you can have more assets under management, right? Because the answer to the question is you just do it in smaller size. If you don't want to bleed as much and you want to have the exposure, then you should just do it in smaller size. You should be long the net, right?

Yeah, yeah. You should just be long the net, but if you are a manager and you want to have higher management fees and larger AUM, then you can sell more of it to have the same net you would have if you were only long. Long that little bit. Exactly. But the problem with... So I'm with you on the idea. And yes, you can have higher AUM because you need all that capital to do both sides. But

The problem with it is going back to my earlier point is the counter thesis nature. So you create not just an obstacle to your payoff, but a direct counter. It is the most opposite thing that you want to happen during the times that you want your thing to go well. Right. So it's time aligned opposite. It's not just the opposite. Right. It's not just basis risk. It's risk to the very thing that is ideal. Right. And so to me,

Like I understand other sources of carry. You want to be long vol, so trade some, I don't know, some equity market neutral book that over here has a complete different behavior and it pays its carry to generate or to pay for that tail that you own on the side.

That I almost understand more. It's another independent source of carry, or I guess relatively independent. But when you're shorting vol to pay for long vol, it's to me, it's just like, I keep on saying this counter thesis, it's wearing a weight belt and trying to do the high jump. And I, and I,

for whatever reasoning there is, and yes, it's a good source of carry, it pays for it, but it goes, and I've seen it go wrong, when things matter, that's when it doesn't do right. And for example, a popular spread is to be short the belly and long the tail, right? So you're short at the money and you're long out of the money. And so when there's a correction in this example of not

great magnitude. Let's say it's not a COVID 30% sell-off. It's just like the 10% sell-off in the last few weeks, right? So you're at the money is going to get more hurt, the thing you're short, than your long tail, which is far yet from being kicked in, right? Because it's not a massive sell-off. So the market's down and you're down because

because your short is against you, right? So in that sense, because vol did spike, right? So your local short or your at the money short would therefore be hurt while your long tail, which you really are waiting for this big event has not worked. Therefore, not only do you have an attachment point, not only do you have to wait for a bigger event, but you're getting hurt while you're waiting, right? And I liken this to, you know, I think of obviously, tail protection is in a way like insurance, right? It's not as pure as insurance, but it's a form of insurance.

So another analogous way to think about it is insurance with a deductible or else the opposite, right? It's like you're in your car and you have an accident and then you don't want to hear from the insurance company. Wait a second, were you on a side street? We only cover freeways.

That's the last thing you want to hear when you're trying to fix your debt. And not just that, but not only do we not cover side street, but you were short some of all. So you know what? We actually need a check from you to pay for the other guy that got hit on the freeway. The whole thing is upside down. And there's many ways we can say it, but I don't like the idea that if you're trying to be protective, if you're trying to be defensive, then be defensive.

the idea of like volatility drag and the benefits of, of having a smoother ride are, are very clear. And a lot of people talk about it, but as you said, it's hard. And I think the question though, is if it's done wrong, trying to account for volatility drag, is it more harmful than not accounting for it at all? And I think there is strong evidence to suggest that

poorly trying to fix the volatility drag problem can be more harmful than just ignoring it. I'm more talking about in the lumping of strategies, that strategies in general are grouped together. And if you have an experience with a manager who says they're trying to solve the same problem that you're trying to solve and they have done it poorly, then people write off the idea altogether. Oh, I see what you're saying. Yes, yes, yes. The idea that when it's done wrong, which it often happens,

maybe it undermines the whole industry. And so the souring of vol as a as a source of protection, right, when people like me are recognizing that it should be done more right

But those who aren't are hurting me. That's the point you're making. Yes. And that, that when you go out and you try and say, Hey, have you considered adding this exposure to you? You are fighting against the two time, you know, the once bitten twice shy on the idea of some sort of long volatility exposure. Is that something that you have to deal with? You know, I, the, the, the first time I started to really hear about long vol, um,

Obviously, it's existed for a while, but it gained a lot of popularity in 2020 after COVID. I don't know how much time you spend on financial Twitter or in financial media. The number of interviews, conversations, threads that were going on about long volatility were

numerous compared to what we see today. Four years after, four and a half years, or yeah, I guess almost five years to the day from the, it's March 20th. From the bottom, yeah. From the bottom, here we are talking about Long Vol five years later. There's obviously the natural kind of the human condition to be excited about what worked in the moment and then people forget, right? And that's just, yeah, we got a lot of interest and inflows

in 2020. And then suddenly it's less interesting because now the market recovered, not just recovered, but recovered rapidly, right? By April, May of 2020, it's almost back. And I forget, but by the end of 2020, it was like nothing happened, right? It was that violent V-shaped recovery. So I'm

I mean, it happened. We can't say it didn't. So when that happens, people look at it and say, well, why do I need protection? The market just comes right back. Buy on the dip. And so it's not, you know, there's nothing to risk. Just it's a new buying opportunity every time it drops. Obviously, that hasn't always happened in the history of markets. But the memory that people have is that it worked when it needed to, but you didn't really need it in the end. And then second to that, the real big drain or, you know,

downfall of vol was in 2022 right 2022 was a horrible year vol did not i'll call it behave well right but that's what at least the the media um or or the popular uh talking heads about vol had to say

And my view is that I don't know that it necessarily didn't behave well because it was a different sort of downfall in the market. The S&P's fall of, I think it was the low 20s, let's call it about 22% in 2022. And I just remember it as 22 in 22 was, was, was,

was a different, was not a COVID, it was not an event, it was no stress. It was a slow turning over economy, right? Where there were inflationary pressures with numbers coming out, you know, every month or quarter, it was CPI, and it was the employment, or unemployment rather. And so each time a number would come out, you're slowly iterating towards

This kind of information flow that's going to lead to what's going to happen, what's the Fed going to do? And then when the Fed would would make a move on rates, they're not going to make a hundred bit move. They're moving 25 bits. So it's like plus minus 25 is your window of uncertainty. Right. So all of this call it tight windows of uncertainty or not much uncertainty.

and or not panic or stress events, but a slow changing environment is not what vol is wonderful for. It's not volatility because there is not panic. It's just things are changing.

And so the year 2022, when there were two or three periods during the year when the S&P did crack, let's say 10% or more, which we'd all call a correction phase. But when it did so, it did it as part of this kind of grind down bear market. So

had there been some news event and a headline you know whether it's a an attack or a virus or whatever it might be then you have people stressing when it's just part of this grind down bear with slowly output numbers then panic does not ensue and vol does not spike so people start to say well vol's not behaving and so we can't rely on it for equity sell-offs i say well

you can rely on it for panic or stress events that 2022 was not one but the point being the larger world saw the market go down and vol not pick up therefore it doesn't work right or it didn't work as well i think that changed a lot and i remember those year that year not not not only defending vol

But making this point that this is not really what it's made for, so to speak, or not what, you know, Vol's not made, but this is not where it does its ideal, or has its ideal purpose.

output. And so in that respect, you know, but that has to be a conversation. That has to be an understanding, a conversation, an explanation. Whenever you need explanations, things are, you know, you've already lost a little bit. So stepping back to the wider world, the market recovered in 2020 very quickly, and then it didn't work in 2022. So by the time, and then '23 was a raging bull, right? So why do we need vol?

We stand there and say, that's all nice, but there'll be another event, right? And whether it's 08 or 911 or LTCM blow up or just go down the list that every once in a while stress ensues and vol does its thing, right? And as long as you're there, you're going to get a wonderful payoff that makes it all worthwhile having.

Who were the buyers at the beginning, like 2015? Who were the people who understood the thesis then? And then who were the people who came chasing in 2020? And then who are the people left now? In 2015, when we got our initial capital was a diversified basket of investors.

equity, either arbitrage or equity market neutral. Right. So let's say other managers, about a dozen or so other ARB based managers, but all ARB based managers, whether merger ARB or stat ARB or just traditional EMN factor based equity market neutral, all of these exhibit negative skew.

i.e. long and short books or paired trading books that are typically mean reversion driven. When markets behave normally, the expensive goes down and the cheap goes up and their trade mean reverts. When markets suffer stress,

The longs are being sold and the shorts are being covered and all these unwinds are happening concurrently across all these art books. Right. And so whether it's independent art managers or big shops like Millennium, the concurrent unwinds creates bigger drawdowns than people expect from these type of, quote, stable strategies.

So they all exhibit this negative skew or negative convexity. We understood that. We saw that over time. We saw that you could have an equity market neutral or ARB fund that's up 1% a month for years, and then you have one month down 10, right? And you wipe out a year and a half of return or whatever.

And so we realized that there was a great, you know, we pitched this idea, we're a great offset to that, because if we could carry long vol at almost no cost, but be there during those moments, then we'd be the right offset to that

quote, carry of our mean reversion based strategies. So our initial launch in 2015 was with a basket of that that we are hedging to its negative convexity or its negative skew. And so we had just the right amount of our tail risk approach of our it's the same trading strategy we run today. But it was looking at this this multi basket portfolio. And lo and behold, over those years, we achieved that right. There was a correction I remember in August of 2015

S&P corrects about 10%. Then there's another one comes in January of 16, again, about a 10, 12 percenter. And so in both of those,

As exactly we thought, the EMN and our books draw down, we pay off, and our total portfolio is up positively the way we planned. And so we see that this really does work in that manner. And this allows us several years of not just innovating what we're doing, but getting confidence around the trading strategy and around the original thesis, which was so out of the box back in 2012. Right.

So, and we are lucky enough to have an institution behind us that wanted this basket put together and they wanted it to be hedged. They understood that these mean reversion traits exhibit collectively negative skew. Fine. So that goes for a while. And then once we were successful and had success,

I'll call it proof of concept in running that we said, OK, now we should be launching funds and offering this to the world. And so then we go out about twenty eighteen, twenty nineteen, trying to put a fund together. And it's very hard to raise capital because it's one thing to work with an institution that wants a basket of funds. It's another thing to start fresh and find a founding or seed capital for this.

So the funny thing is you talked about I know your background had real vision in it. I did an interview on Real Vision back in late 2019. I remember at the time saying, you know what? Anything can come any time. It could be, you know, next month the world blows up. And now this was December of 2019. Right. And that's hilarious. Not hilarious. But February of 20 begets exactly what I was talking about. The type of thing that could happen.

And so we are running a few small accounts as SMAs during that period. And so I was talking about it and then this happens. We have a very nice payoff because we're pure long vol. And suddenly now we get a lot of attention from the world of kind of real vision watchers and from the returns that we generated during those periods.

So now it becomes a new type of investor, which is more family office, ultra high net worth and kind of the smaller institution. I'll call it fund to funds.

And this is from just witnessing that we did what we said in 2020 and it, quote, worked. And so a flow of capital comes in and we went from the small millions to something north of 100 million. I forget the exact number, but and that was nice for us. OK, now we're on the road. But then the next few years were.

it, as we were talking about a few minutes ago, became more difficult to not only to raise capital, but to keep the capital we had because the market, there was no other vol event, right? And so as time goes on and we have no right skew payoff,

the people that are with us start to get impatient and, okay, why do I need this? And markets are behaving well. And it's harder to raise new money because COVID's happened, right? And so the bad is behind us. And of course, the market did what it did as we talked about earlier. It recovered all the way in 2020. Vol didn't work in 22 and 23 was fantastic. So it just became difficult over the next few years to actually grow further from that amongst the same crowd that we got going with.

Shoot Forward is around those same years, and I don't remember the exact timing of it, but all through the years of 2015 through I'll call it 2022, those seven years, we are still talking to lots of institutions, sharing what we are doing and sharing from our perspective, the beauty of pure long vol versus these spread trades and how different we were to the rest and how that made us so much more reliable. And

Eventually, some institutions, I guess, that followed us heard it, saw it, understood that both what we were saying and saw it pan out in reality or in forward looking. And then eventually started coming and saying, okay, we agree, we understand. And from that point on, we started getting, I'll call it material institutional capital. So as these

COVID-based high net worth and family offices started slowly leaving from impatience, so came in the higher end institutional capital.

which is pension capital and things of that nature. And so today, the majority of our assets are these grand institutions, larger accounts who fully understand what we do and who have been one of my current large institutional investors. I met for the first time in 2016, telling them, showing them what, hey, look, we're a risk overlay. This is what we're running. And it took them years, but they finally

saw and understood and agree and love it for what it is. So these are the accounts that we're now managing. These are the ones that and the same kind of accounts that we're now talking to mostly are these larger scale institutions who see our place in the world and understand the value of a reliable long vol product.

Would that have been possible without early success pre-Logica to be able to fund the operation? I mean, you mentioned the number of people that you started with. A lot of people start out two guys in a Bloomberg in their garage. So to be able to make it seven years, to be able to continue to have these conversations, how much of that was due to early success to be able to fund building the track record and having the conversations? Yeah.

Yeah, it would be very hard to do. I did capitalize a lot of it myself. I was a staunch believer. I still am in what I'm doing. I'm an entrepreneur, right? And so and I love what I do. And I just there's I had early success in my life. I'm a trader. I've done well. And I, you know, when I started Logica, it was with a good foundation of capital. And I said, I don't care what it's going to take. I believe in this. I want to build it. And I did. And I

You're right that that makes it it's a big barrier to entry to others who'd say, well, I'd like to try that. OK, well, you know, make sure you have a lot of capital to sink in before you get any dollars back. And some people even that have that don't want to take that risk. And so I understand all that. For me, I was just.

so passionate about the idea and so much believed in what we could do and how valuable it is to the world, how rare it is and how valuable it is. Therefore, I have to do this. And I'm not going to be cheesy and say it's a calling, but it's a call option. How about that? It was just so meaningful to me that I just...

That's all I wanted to do. And yes, I was well capitalized and I don't think one could have done it otherwise, but that is certainly what it took to make it happen.

Yeah, there's just a lot of theta bleed probably in launching your own hedge fund. Yeah. And especially when you take two years or more of R&D and I was carrying a team and an office and all that. And I just, I didn't even think about that, honestly. I mean, I could, so that's nice, but it didn't even cross my mind day to day. I just like, let's do this. Let's make this happen. Today's episode is brought to you by Fintool, the AI junior analyst tailored specifically for institutional investors.

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That's Fintool.com. Now let's get back to today's episode. One of the questions that I've always had about strategies like this are the rebalancing mechanics. Because I think obviously the idea is that you do well and then kind of the money gets put back into those negative skew trades that should in theory work well. I mean, that's part of the reason it's so important to protect against drawdown in a market neutral situation.

Despite the negative skew they exhibit, they just don't have the market beta to come back in the recovery. So if you take that drawdown, it takes longer to come out and hence why it's so important. But let's say you do have the ability to take on market beta. You've got positive return from a strategy like yours. How is the money then getting redistributed and rebalanced back into the strategies that have then drawn down?

To your point, whether somebody has long beta and they want to hedge that and to mitigate their risk or they have long beta, they want to have some risk mitigation so they can have more long beta at the same risk or whether they're equity market neutral or some arbitrage that just has an embedded negative skew that they want to hedge. For all these reasons out there, the risk off long vol approach is an offset.

that every once in a while is needed. And then to your point has to be rebalanced for back to the strategy. So the way we understand that, like, you know, I can't look at it and say, okay, we know our place in the world.

And we understand that we exist and we need to be the bank when those moments come. And so we tell our big clients that and that's fine. And that's like, stay with us for years. When that event happens, take out for your profits, redistribute, buy if you want distressed, put more into your mean reversion, buy more beta, do what you want, buy the S&P down 30%. Great.

You can have our cash because we naturally monetize. That's part of our trading strategy. We're trading around, you know, going back to what we actually do. The essence of our strategy in carrying long vol without a short leg is by scalping around our long positions, right? We are trading around them every day and generating, I'll call it nickels and dimes that in the end, hopefully cover that cost of carry. So,

More so as events happen, we're monetizing that payoff along that path. So VIX goes from 15 to 80. We don't hold it from 15 to 80. We're scalping at key moments along that path. By the time it hits 80, we might have sold out of most of our book, right? Because at that point, even I'm going to say vol is mean or visionary. Like don't buy vol at 80. I would short it if I could, but I won't. So I'll just not own it. How about that, right?

In fact, we are shorting it. We're just shorting our long inventory. Right. We're selling out of what we already own. That's that's the selling we'll do. The point is that we naturally monetize by virtue of our strategy. So once I'm in cash, I say to my institutions, take that cash, buy, buy out all the distressed right now. However, please come back to me when you're ready. Right. And that's not an agreement. That's an understanding, because the fact that we do that means that or that rather that we will do that means that they can use us for that dry powder.

And then when things settle and, and, and I don't know, it could be in COVID. It was by the end of 2020. Okay. Now we can put a little bit more back with you. You know, we've rebalanced our portfolio. So I do want to be that in out or take me when you need me, give it back when you don't. Right. And it's, I guess, yeah,

Like I started out saying that is our use case. So I can't sit here and say, oh, I hate that because it's what it is. It's part of who we are and why we exist in the world. So I embrace it. Now, obviously, the COVID recovery was extraordinary, the speed of it. So maybe we're anchoring to like a truly anomalous event. But.

Like, like a fast, a low bar is monthly liquidity, like monthly liquidity during COVID you would have, you would have missed even some of the recovery at that point. So what type of like gating on capital should somebody with a strategy like this be thinking about? I mean, are you able to give money back?

like in days how does that work it's a little bit biased in that the larger the capital the more kind of flexible we're willing to be so I mean it's just harder to do with smaller numbers but with with a larger account and I mean let's start out at the core we are what we trade is the most liquid stuff out there we're trading S and P options uh front month at the money uh generally it it's

we can be out of our entire portfolio in a single day without issue and without much slippage. And in fact, it's even better than that in the sense that we're on the right side of the trade. I like, for example, a lot of people trade the VIX structure and the VIX structure when, for example, there's the pop in the front month versus the back. And so, but all the traders of the VIX are

when the event happens, will want to move along that VIX curve, right? But they're all moving the same direction. So there's no natural buyer or seller of their other side because they're all on the same train, right? And when you're long vol, we're long S&P puts,

Think about a COVID, you know, March 20th today, as you and I said a moment ago, today was effectively the bottom. I think it was March 21st. It was tomorrow. But in that moment, we're long puts for us to close out our position is just buying the S&P. Right. So all we need to do is buy a market that is collapsing.

And so it is the most natural other side. We don't have to reach for liquidity. It's being thrown at us. And so to me, that's the other thing is the great beauty about being long vol is that when you want to sell it, it's buying the market. In this case, when I say long vol, being long S&P puts or put options means that when the S&P drops and you want to close your position, you're just buying the S&P. So

The beauty of that liquidity means even in the worst of moments when others are necessarily struggling, we can be out and we can be out in a single day. So to answer your question back to the direct question is we're liquid to a single day. We don't have the size yet to even know where that challenge hits, but as of now, there's no challenge.

Now that we know that that exists at the core, now it's just a negotiation. Well, do you want it in that day or two days, three days, four days, a week, a month? Right. So now I'm just saying, OK, this is what we can do. Where are you and how much capital is behind this negotiation? And that's where I guess we come to terms. I guess given how liquid we are, we make it meaningful for what that other entity would be.

Well, and as an organization that you're dealing with, how nimble are they? Like if they have an investment committee and to make a big, it's going to take them a month to make a decision anyway. And that'll be the discussion. If they say to me, listen, we have a committee, it'll take us at least two weeks. Say, okay, so let's start it. Are we 14 days, 21 days, whatever the, exactly.

Yeah. And to your point on the liquidity, as you said, like a lot of people are short the belly and long the tails. And if you're at the money, you're constantly buying the belly. Everybody else is looking for the tails. The belly is the thickest. The belly is the thickest liquidity across the entire option surface, especially on S&P, right? Not only are we in the thickest side of optionality, but we

we can also close it by buying the S&P. So we could sell an SPX option at the money or at that point we'd be deep in the money at a correction. So if we start at the money and S&P drops, now our at the moneys became deep in the money. So we're at that point, let's say delta 0.99. We're effectively short the market delta one.

So we can sell that or we can buy S&P, just close it out and we're done. Right. And it's the most natural liquidity in a crisis event. That's one of the other things I love about it.

I want to shift a little bit to continued R&D, continued innovation for two reasons. One, R&D for R&D's sake, but then also because the market structure evolves and you need to evolve with it. All of the big brand name hedge funds, part of the reason that they continue to gather assets is because of the money that they put back into their systems and into their R&D. So

How has that looked for you? Yeah, I mean, the years like from the initial strategy, what's funny is the core thesis that we launched in January of 15 and that we are indeed in

in 2012 through 14 has not changed. It's the same thing. It's scalping a long straddle, right? And so that's still what we're doing. That is the material thought is there and has stayed there. That's who we are. That said, all the pieces around it, how we scalp, the signals that we look for, for the timing of each scalp, for what we're scalping across the option Greeks

Those have all innovated and I'll say innovated. The R&D hasn't stopped. It doesn't stop. That's who we are, right? As quants, I don't, I don't, we don't read books.

analyst reports i don't look at companies i don't i i i can't remember the last time i turned on cnbc it might have been 10 years i i don't even remember right i just it doesn't matter i don't listen to the outside world because we're busy building and and testing models right we're doing math we're brainstorming how we see behaviors work and like this is all we do so when we say like

do we do R&D? I don't know what else we do. That's part of my every day. Right. And I have an R&D team that is the essence of our day to day activity. We have R&D and operations.

And sure, every day we execute, but that's the smallest part of kind of the job, if you will, of what it is to be a manager. To me, it's exactly to your point. Markets are so dynamic that alpha is constantly being chased. There's so many others that want to get in on the game. You have to keep on innovating.

And so, yeah, I know that at the core and we have just dedicated time with it. And I don't think a day goes by when I'm not whether I'm doing it at work or whether I'm laying on my pillow at night thinking about some idea. I don't know how I live without R&D. It's kind of in the blood, if it makes sense. And so, yes, it's constant. We've innovated quite a bit, but it's so in the details.

I mean, I can, you know, it's like I said at the beginning, the core thesis hasn't changed what we're doing. It's just how good and how much better we've gotten at doing that is all a function of R&D. For a total layman, I'm thinking like how much of it is

Is signal getting stronger or weaker with existing models and how much of it is looking for new signal? Like monitoring the strength of past models and signals and saying, why is the signal getting stronger versus getting weaker? How can we tweak it versus are there other signals out there that we are missing or that have popped up as market structure has changed? How do you think about it in terms of those two ideas of R&D? Yeah.

I mean, all of them are valid. I say above all, we're always looking at our own book and the different pieces of it and say what's working and what's not right. And you want to know on the weak spots, why are they weak? Are they going through just a regime that they don't like?

has something fundamentally changed, right? I'm a big believer in kind of focus on your weaknesses because that's it's the weakest link breaks the chain, right? Whatever silly adages we can come up with. And so we're constantly looking at the weak side of our portfolio and saying, what's wrong there? Right. And in fact, we've recently launched some new funds that have

to that point, taking the best of what we do and lifted it up. We kind of got rid of some of the weakness and we realized even between the call trading and put trading within a straddle, you have both sides, you have long calls, long puts. We found that we had higher alpha on put scalping than on call scalping. And so we've reduced the call scalping, increased the put scalping. And these things, first one has to determine...

If there's behavior in the past that didn't match the models, is it within the reasonable band? Has something really changed? Is it just a weak regime, but it's going to come flying back? So we do all this analysis. And once we determine that, no, something material is different here, then we constantly drop the weakness and add to the strength. In fact, I'd liken it to managing a portfolio, a traditional stock portfolio.

100 stock portfolio manager, drop the weak ones and keep on adding to your strongest, right? I don't know that that's what everyone does, but that's how I believe a portfolio should be managed. So the same way, that's how we manage our R&D signals, if you will, or that's how we R&D our signals is drop the weakness, improve the strength. And that's both on what we have going. And the second part of what you asked is,

looking at the market, saying what's different today than what we looked at a few years ago. In 2022, we talked about a few minutes ago when vol wasn't "behaving" or at least it wasn't reacting because it wasn't a real stress in the market. We looked at that and said, okay, this is an interesting behavior of vol. It's expensive. It was trading between 20 and 30 on the bix. So it's overpriced versus the median of about 16 on the S&P. And so it's overpriced and it's not spiking.

and it's in this range, right? So we have a range bound overpriced non-spikey vault, right? This is a new, like, what do we do with that? Right. And so that becomes a whole study and say, is there a way to take advantage of that? Do we do more range bound trading versus spiky trading? And I'm just using terms to describe the bifurcation, but these are the kinds of things that happen as you see a market, you see it doing something that, oh, I haven't seen this before, or I have, but now it's kind of shining brighter, right?

And then you start studying it. And as as quants of people have been doing this for, you know, I've been a trader for almost 30 years now and focus on the vol space for almost 15. So at that point, I know what I'm looking at. I know what I'm going to think about. And I have discussions with my team that are in the same place. And so we start honing in on what to look at more precisely and then figure out ways to test empirically if what we think is real is real. And then that's just a feedback loop.

Yeah, it does. And then what about putting things in the closet? Yes, we could think like that. But no, we don't love thinking like that in the sense that if you keep on – because when you're in an environment, it's a while before you know you're in it.

And then by the time you think you're in it, then you're coming out of it. Right. So timing the market is effectively impossible. And so to say, oh, I'm going to have this on a shelf. And as soon as I see that regime, I'm going to plug and play. It's not that easy. It doesn't the markets don't work like that. And by the time you plug it in, it's you've just missed it. And so what we and I think the second part of that is to say that that's a little bit more kind of curve fitting. And so for us, it's.

looking at a year like 2022, Vol behaved differently. We try to infuse that behavior into everything we ever knew about Vol.

and say not that we're going to plug this back in if we see a 22 again, it's that now vol has a wider set of behaviors. And now we know more about what vol can do. And so we have a larger scale signal set across vol behavior. And it's always there because I don't know if tomorrow is going to be the beginning of a 2022 like regime. Right. And and so

That's the no part. They're not shelved. Yes, they're all infused and they all maybe have a waiting system that when this looks more like this, this will pick up, but it's always there. Rather than putting on a shelf, we'll leave it in at, and I'll use broad strokes to make the point, we'll leave it in at a 10% waiting, but then as this other signal starts to show

that that's liking the current regime more, it'll lift up to a 20% weight or whatever. And so they all kind of exist concurrently because we can't time the when. We can just scale and unscale them or increase or decrease these based on other signals that are helping us determine what regime of vol we're in. And that's kind of, to me, that's the less curfew, more robust way to do it.

Well, I think the million dollar question everybody listening would like to know is what is the regime we're in now? It's not 2022. Yeah, a couple of things.

Vol has more recently been more responsive, right? Which is good, meaning S&P draws down, it kicks in, right? It's like, oh, something's happening, right? I think there's a little bit more, if I translate Vol's behavior to kind of popular news and headlines, there's a little bit more fear slash uncertainty around perhaps the geopolitical regime. And so that you see that

wider uncertainty band expressing itself involving more, I'm going to call it poppy, right? It pops quicker and it'll take off a bit faster than, for example, 2022. So it's an active vol ready regime. At the same time, there's this other side of the coin where it also crushes a lot quicker.

i.e. there's a lot of, as soon as it spikes, vol sellers come in fairly quickly. And so we're seeing more of this over the years, that anytime vol spikes, I remember in 22, every time it hit near 30, it would just crush right back down. And it's almost obvious, just sell it at 30. I'm talking about the VIX, as a proxy for implied vol. So

that that that crush sell off or the kind of the the wave of of all shorting that comes in after the spike, we're seeing more aggressive today also. So more aggressive spikiness, but more aggressive selling off quickly. And of course, the selling off quickly. We know that if there's a real event, they'll get further hurt and vol will spike even harsher because there's going to be a short squeeze.

But in the times where it's not a real event, when I say it's not real, it's not a COVID, it's not something where the world news is all over every news channel, something happening.

then we kind of have this infused idea that, or now we know that it's more likely to crush quicker. So you might, for example, pick up your speed of scalping, your monetization speed, things like that. To me, that's the environment we're in right now. You can trust it to be more spiky than 2022, i.e. vol works, but get out of it quickly because it's not going to be there for you so long. That's my best kind of grand definition of where we are today. And by the way, that can change tomorrow.

Yeah, right. Now, what about the next evolutions for Logica? Obviously, right now, you're focused exclusively on S&P equity vol. Is there any value in expanding to volatility of other asset classes? Is there as much concern with...

managing drawdowns for other asset classes other than equities or... Because it's all based off of allocator demand, right? There's no point in building a product nobody wants to buy, even if it works.

Yeah, yes and no. I mean, of course, there's other vols. I mean, other asset classes that have vol, of course, whether currencies or rates or whatever it might be. And sure, there's applicability to what we do, i.e. scalping long vol that might be applicable in other markets or should be. There's no reason it shouldn't.

The one thing I'll say is that we've grown, we're experts in equity vol and we've grown more and more knowledge over, you know, going back to 2012. It's now been 13 years that Logica has been doing just equity vol. And so you learn a little bit in 13 years, even if you tried not to.

You've made a bunch of mistakes, you've learned from them. And if you're a learning type of person and curious, then your knowledge base increases. So to that end, it's hard for me to sit and say, okay, let me go approach another market when this is what I know so well and I know it better today than I ever did. And I think I'll know it better in three years from now than even today.

So on the heels of that, I guess I'm saying I'd rather become more of an expert and get better at what we're doing always than start venturing out to other areas. There's somebody else who trades currency vol, let them trade it.

And, you know, I'd rather be the expert in this and call it a day. And I think there, and I'm not, I think we have lots of R&D initiatives right now. There's areas we know we can get better. There's, we've watched our alpha improve in different ways. We have clear paths to new alpha that we're looking at, that we are, I'd rather go down that road in an area I know than explore where I have to learn from scratch. So to answer that point,

This is what we're going to focus on and be really good at it. That said, there's more ways that we can express this.

And that's where I feel like there's kind of evolution or growth to affirm. And so recently, in fact, a couple of months ago in January, we launched some new funds, one in January, one in February. But these are focused on taking the best of what we have, our short alpha generated by put scalping and marrying it with broad long equity exposure and kind of optimizing a rebalance and a kind of

marrying the risk on risk off worlds right and so we we have one product that is uh targeting market neutral another that's targeting uh positive beta but all of them convex at the at the heart because their their their substance is our long vol short alpha and so if you you take that and you marry it with its natural complement the equity world you can get a really cool uh

for example, equity market neutral behavior. But instead of being concave at the tails, it's convex at the tail, right? Because it's embedded with long vol. So these are the ways that we can expand, I'll call it, by broadening out how we can express our trading and portfolio construction, our ways to innovate. And that's what we are currently doing rather than saying, hey, let's trade rate vol or currency vol, which are things that we're not as knowledgeable about.

you know so many trend followers are out there saying if you take my trend following strategy and you add it to equity beta i swear it's going to be better right well why don't you just put it all into one do it right give it to you and then and then you have it give the people what you're trying to sell them we came to the same realization right it's handed to you on a silver spoon here it is like we're trying to tell you to marry this so we'll marry it for you not just will we marry it for you we'll do it at the right ratio or the optimal ratio of our of our quant

rigor and at the right rebalance. Right. And so with these optimizations, it should be better than a simple marriage, if you will. Right. And then exactly. So same point. Is there any thought about layering in other positive skew strategies with the ones that you're focused on? I think that's for other people.

people to do when I say that there's like you know whether it's multi-vol funds or multi-straps or like you know there's somebody could take us and a CTA which are two you know we're pure long vol the CTA is

call it synthetic long vol, and then marry those with equity risk on. So that's a fun of funds. That's a multi-strat. But that's not something we're going to do. That's something that we're going to hope or talk to people out there that are trying to do. We're a really good piece of the puzzle in that mixture because we're so unlike everyone else out there. We actually marry well with

the traditional long vol, which is long vol through spreads, right? So we're lowly correlated to them for how different we do it. So in some multi-basket, there's definitely good, I'll call it marriages or blends, but we're not focused on doing that. We're focused, once again, on being the best at what we do and letting...

others discover how they can blend us, but giving back to the prior point, the most obvious blends, which is us with equity markets, just because that's so natural, right? It's pure, it's time aligned versus when you start taking us plus a CTA, yes, they should work well together, but you have some basis risk to that correlation, right? And so I don't want to get into that. I want to just be the purest and offer a kind of pure product in that, if you will, relative to what we know and understand.

Okay. Well, my final question is, you talk about how if you do something for 13 years, even if you try not to, you're going to learn something. What about the investor community, the allocator community? Yeah. I mean, I could even broaden that question because I was – before Logic, I was also in the –

in a different asset class, but I went through 08, right? And so I saw investors grow a lot after the global financial crisis, including myself. And so, I mean, investors have grown in that, I think,

over time, to your point, and I'd say the same, is there is more and more product out there, and there's more and more availability of information. Now you want to know about LongVault? Not only can you Google it, you can AI it and ask Perplexity or Copilot or whichever which one, and learn a lot about Vault more than you ever could, right? And see what a bunch of managers have done during 08, during 2020 COVID, right? Et cetera, et cetera. So the number of

data points available today. And the amount of information at our fingertips is so much more robust or available that investors just know more. At the same time, there's, I'm trying to think of the right way to describe this. Sometimes when you take in a lot of information, but there's still a lack of understanding at the core, it's like information, but it's kind of getting twisted. And so like you were saying earlier that

you know, we sometimes face obstacles as investors. We say that we're long vol and right away people will say to us, oh no, options can blow up. And I'm like, hold on, we can't blow up, we're long vol, we're long options. We can bleed, but we can't blow up, right? And we're long both tails. And so in that sense, it's first an education of what an option is. And if you're long it or short it, how fundamentally different those two positions are.

One's negative skew, one's positive skew. And just what skew is, high hit rate, low consistency, or low hit rate and high consistency. These grand ideas have to be understood at the core to then take in all this information and process it properly. And so what we see is that a lot more people will use more

kind of terminology and like oh what's your what's your deltas and your gammas but do you really know what you're asking me right and i you know to be polite i want to be able to say listen that matters but let me let's back up a little bit let's start it like just pure long vol versus spread trading right and what that means so my answer is there's more educated but it's or more knowledge of terms and ideas and what should and shouldn't happen

But it still takes a lot of explaining because it's in this niche of all. There's a lot of granularity that really matters, that makes a material difference of what you can do for the world. When you're simply long an S&P put, you are highly reliable. And I talked about this recently in a monthly letter we write.

Which is our risk mitigation is structural. It's structural protection. It's not a bet we're taking that long S&P puts will go up when S&P falls. That's the behavior of that instrument, period. And so the bet we're taking is how do we hold that thing and not lose money while it bleeds? That's a different bet.

So to understand that fundamentally changes the game, obviously, or changes the discussion. These are the types of discussions that I still have to have. No matter how educated people are, it's the basics that we have to try to still work through. So I like that people are more educated. It also can be more of a challenge because it's missing some important kind of fundamentals. I hope that makes sense. But that's what I've experienced in recent years. No, it's not what you don't know. It's what you know for certain that just ain't so.

There you go. Yeah. Yep. All right. We'll leave it there with that turn of phrase. Wayne, thank you so much for joining me and hope to do it again soon. Thank you very much.