Do You Feel Crappy About Your Finance Career?

After sending some advice to a friend that referenced my own career in finance I thought it deserved further comment.

A post-script for finance people

For fellow finance people, this deserves a few more words. Whether or not the field has been very lucrative for you, I’ve noticed finance folk often struggle with dissonance. Maybe you think every time a private equity suit quits to start a lifestyle biz in a LCOL state an angel gets its wings. It’s true, finance as a matter of daily agendas can be soulless. And making lots of money may just delay the questions that those with unlucky careers would have faced earlier. Compounding matters more, finance attracts its share of grifters. The Wolf of Wall Street is a great movie but a bad boss. Stir in a heap of leverage and finance collides with the physical world in numerically unnatural ways. Glistening wealth. Nation-state sized corporations. It can look a bit disfigured.

That said, I would push back strongly against judging finance by its worst. If it’s dry and brutal it’s because finance thinking ultimately boils down to efficiency. On a macro aggregate level it is nothing more than reducing transaction costs. Transaction costs between the present and future. Transaction costs between people who do not know each other. Matching lenders with borrowers. Savers with risk-takers.

Its cold bean-counter logic is a feature. Viewed over decades, the rent it extracts is a sliver of the value it facilitates. If it looks large it’s because the value is large. Every incremental squeeze in margins boosts consumer surplus whether or not a journalist thinks that’s a story that will get clicks. Yes the progress is uneven and there are unsightly moments (cough Goldman Sachs basically being made whole by US taxpayers after 2008).  But when people in finance start talking about missions and visions well that’s when you should reach for your wallet. I mean just imagine if a Wall Street brokerage were named Robinhood. For most of finance folk the job says “look I’m just here for the money”. It may not exude cool but it is honest. The dissonance only creeps in when you dress up the job or need it to be cool.

My email’s implied dissatisfaction with finance has nothing to do with finance as a villain or its perceived societal value. It has to do with how I personally absorbed its cold logic. Working in finance requires mental lenses. These lenses are not just effective but useful in so many contexts. Being somewhat prone to getting carried away, the seduction of optimization crowded out some of my pre-existing lenses many which had still not matured. As we always discover in these letters, every strength has a trade-off. If you lift but forget to stretch you get tight. The histamines you detect in my email, are a reaction to some personal Randian remorse.

So if you are going to be a relentless optimizer, make sure you check in every now and then on what you are optimizing for. The friend I wrote to knows to get anything done he’s gotta put his head down and grind. But in the moment he paused for a breath, I hope he found my email to be fresh air.

Personal Career Advice to a Younger Friend

I want to share a recent conversation with a millennial friend whose young career intersects with many possible paths since he writes, invests, and sells. He asked how I thought about my own endeavors. It’s not something you’re asked every day. It’s like being asked how a thermostat works.

My full response:

A meandering thought here…Writing and communicating better are explicit goals [of mine]. They self reinforce firstly. But also the writing part also serves as a test and a mirror for your thinking. I want to always be tightening that since reasoning better is important to improving decisions and bets. Which means it’s the highest leverage channel for improvement of your personal or professional investing process. But it’s also its own reward. The way learning an instrument makes you appreciate listening to music more. You become an active listener. You try to reverse engineer what the artist was doing. I personally find that this makes life richer because you can find stimulation everywhere.

If you can get your kicks from art, you are richer because you are intrinsically over-stimulated. Take that to its extreme. A person who is intrinsically overstimulated could be content living in a log cabin with a pile of books. That person is more free from material trappings. Hence being richer. You can probably think of people who are understimulated. They can’t sit in a room by themselves. They are always chasing some high. They usually spend all their money. I’m painting a picture of extremes but all of this lies on a spectrum.

I’ve heard of the concept of stimulation in the context of introversion. As in introverts are naturally overstimulated. Introversion/extraversion is probably thought of in far too binary terms. I think I’m pretty middle of the road. I’m using the model of introversion/extraversion defined by “where you get your energy from”.

I’m trying to be aware of where my social, intellectual axes intersect because that will be the foundation of where I am the most useful. If you can be useful in ways which are in commercial demand even better. I happened into my field when I was young and survived. But today I’m more concerned with questions as to where I can be the most useful and having faith that commercial opportunity will fall out of that. My smarter friends realized the value of that introspection earlier so that they can put themselves on long term rewarding paths. This allows you to compound cycles for longer. Rather than compromising for money, only to find yourself on a less personally aligned path later. Especially since there was no guarantee you were going to make money. Either way, you are likely best off going where your alignment is earlier.

Again this is all meandering and I think there’s some oblique advice (or warning) in there somewhere that is hopefully not didactic but just a byproduct of my actual experience.

In short

1. Understand what type of work allows you to be the best version of yourself. This makes you useful
2. Hunt down the matching opportunity that needs your form of usefulness

From there you are traveling downhill which means progress comes easier which means you go farther. And if you were thus aligned, the people around you will all be lifted and that will fulfill you more than anything. And you will feel rich regardless of whether your numbers get called in the game of capitalist bingo.

You Better Understand The Difference Between Contracts and Power

If you want to incite a war give one of your kids an Otter pop but not the other. You’d think I shot Franz Ferdinand in my kitchen. The inevitable refrain “it’s not fair!” is coming faster than you cut the plastic off the top of the frozen treat. We try to maintain a rough sense of fairness around here. You can earn a treat but your brother will deserve at least a chance to earn his own. The whole equality-of-opportunity not equality-of-outcome thing.

It sounds good, but it is one of those fake realities we build around our children to keep the peace.

The first-grader notices the dissonance. He thinks we are hypocrites when we later tell him the world is not fair so he should ignore what other kids have or get to do. I don’t blame him. His thinking isn’t gray enough to appreciate the difference between a local and global variable or the notion of scale dependence (ie it’s reasonable to be a capitalist who practices socialism in your own home).  Why teach a child that life isn’t fair when they are so young?

The earlier you can rid yourself of the “Just World Delusion”, the better. You can’t control whether you are born on third base or in a gutter. You can be destined for diabetes or densely packed with fast-twitch muscle fiber. Nothing has been fair since you were a zygote. Once you internalize this, your empathy reflex starts to fire faster. Your victim-blaming impulse shrinks away. But there’s a flipside. You must pair this compassion with the toughness that an unjust world requires. A compassionate person without toughness is a doormat and a sucker. And worse of all, ineffective.

There’s a good chance that if you are reading this you are compassionate. This is a list of friends after all. So if I can offer an angle to boost your toughness in this unjust world, I have a better chance of helping, so here’s some tips:

1. Heed the words of negotiation guru Chester Karrass: It’s not what you deserve, it’s what you negotiate.

  • Beyond what reasonable people agree are inalienable rights, the word “deserve” holds no meaning to me. I won’t go into it here, but one of the biggest arguments I can remember having with a loved one was over this word. It makes me cringe.

2. Do not mistake a contract for power.

  • A non-compete’s bite doesn’t necessarily come from its letter. It comes from the threat of litigation. A deep-pocketed organization can outlast you in court whether or not the contract can be legally upheld.
  • NFL stars are known to “holdout” of their contracts. The keyword is “stars”. The underlying power dynamic may be more predictive of the outcome than the writing of the contract.
  • If you include a “do not exceed” clause in a deal with a contractor, do you actually get peace of mind? When you enter a renovation, you have little power. A “do not exceed” clause may simply incentivize the contractor to ditch your project if it risks cost overruns. And if you shop for a new contractor for an unfinished job, you are asking for a broomstick without lube.
  • To understand power, you must consider what is scarce. You may have a great product to sell, but nothing is more scarce than screen real estate on top of an Amazon search. Amazon has aggregated all the eyeballs in the western world which is a more scarce feat than Duracell creating a great battery. At the end of the day, there’s still Energizer. The power dynamic is so stark that Amazon actually competes with its sellers by white-labeling commodity products like batteries. This is not new. Costco and Walgreens know the value of their scarce shelf space and sell their own generics.
  • Another example of power is what is known as “owning the relationship”. In the investing world, mutual funds are losing AUM to index funds which passively mimic the SP500. One of the reasons for this trend is that investors are becoming justifiably very fee conscious. Faced with a stingier client, financial advisors are selling their clients’ mutual funds and buying index funds which have almost no fee. The clients now only pay the advisor fee, say 1%, versus the advisor fee plus mutual fund fee. The advisors have been able to defend their own businesses by disintermediating mutual fund managers. So why did the mutual fund managers lose to the financial advisor in this battle? The advisor owns the relationship with you, the client. In the process of giving you a customized plan, they take you to lunch or hold your hand on a phone call. Mutual funds’ performance has not justified their use over passive index funds, but more crucially, the advisors no longer had an incentive to push them since selling them didn’t offer the fat loads or commissions they did a generation ago. If you find this specific dynamic interesting, check this interview.

3. Law of Rent: land rent is equal to the economic advantage of using a site in its most productive way

  • In other words, if you lease space to sell your amazing dumplings or abuela’s tacos, you are competing with the most valuable business that could have rented the space. Not just other restaurants. You are competing with Starbucks and Chase. Landlords will charge the rent that the most profitable business that could occupy the space could make. That’s why there are so many coffee shops while other storefronts remain vacant. The law of rent acts as a constraint on the profitability of a brick and mortar store since the landlord can encroach on excess profitability by raising rents so that the tenants’ margins revert back to fair market rates.
  • A digital example of this has been making waves recently. By scraping a popular site, Google is able to display the result of the most popular search directly rather than forcing you to click through. Google’s monopoly on search has let it go beyond just intercepting, but on to what many entrepreneurs are calling a shakedown.

4.  Wholesale transfer pricing: Tren Griffin shows how the law of rent is an instance of this broader economic concept.

  • When negotiating in this unfair world, you need to understand what kind of cards you are holding. Griffin’s discussion of wholesale transfer pricing will give you a powerful model for understanding your bargaining position. Read it here to see Anthony Bourdain demonstrate the Law of Rent in Manhattan and so much more.
  • For extra credit, check out Griffin’s related discussion on the Free Parking business model. This explains how large businesses which generate network effects can outcompete smaller competitors. It’s especially powerful when marginal distribution costs are close to zero. For double extra credit see if you can recognize this dynamic in the music streaming business, in the ‘net interest margin’ game played by the large asset managers (ie Fidelity), and for those of us in trading, how banks use this model when ‘holistically’ pricing clients’ business. It must be discouraging when a small business finds its entire profit margin being given away as a “throw-in” by a broader business that loss-leads in one vertical to cross-sell in a more lucrative one.

Having a good hand

Since we know the world is unfair, we cannot be naive about power and our own bargaining positions. My favorite advice for ensuring you have a strong hand can be extracted from Naval Ravikant’s algorithm for getting rich. His 3 steps are specific knowledge, accountability, and leverage. The first 2 steps ensure your value, the 3rd step is about amplifying that value.

  1. Specific knowledge is knowledge that you cannot be trained for. If society can train you, it can train someone else, and replace you. Specific knowledge is found by pursuing your genuine curiosity and passion rather than whatever is hot right now. Building specific knowledge will feel like play to you but will look like work to others. When specific knowledge is taught, it’s through apprenticeships, not schools. Specific knowledge is often highly technical or creative. It cannot be outsourced or automated.
  2. Accountability. Take business risks under your own name. Society will reward you with responsibility, equity, and leverage. The most accountable people have singular, public, and risky brands: Oprah, Trump, Kanye, Elon.

The full summary is here if you want to dig deeper and understand different forms of leverage.

By being very accountable in this context your reputation becomes a source of both upside and risk. To get a sense of how great the upside can be in owning your own work in a world which technology makes creation and transmission so cheap, check out this case for how much Howard Stern might be shortchanging himself if he renews his deal with Sirius.

Sociopaths and the Gervais Principle

Several people I have showed the following essays to are haunted. For those of you who work with others in anything even resembling an office setting, reading them is like taking the “red pill”. You will analyze your own language and that of others with labels like powertalk, babytalk, and posturetalk. You will view every person in your work environment as a sociopath, clueless, or loser. Another of my favorite authors, Venkat Rao, unpacks Ricky Gervais’ The Office with rigor and insight that will never let you see an office interaction the same way. I’m not kidding when I say that a few of the people that have read these are now reviewing their professional relationships through a lens that reframes meetings, hallway conversations, and negotiations. I certainly did.

Some tips if you dare. 

  • Read parts I and II fully. After that, it starts to get very strenuous. Let me know if you make it.
  • You don’t need to have seen much of the Office to appreciate this. I have seen a few episodes here and there. 
  • He redefines sociopath, clueless, and loser. Don’t let the baggage of those words misdirect you.
  • See if you can identify yourself.

As they say, caveat emptor.

With my highlights:

Gervais Principle, Part I
Gervais Principle, Part II


Original source at

Get A New X-Axis

Just as memories, not clock time, measure duration in our minds, there are many yardsticks for measuring duration. Baseball uses innings. Our boys measure how long before mommy comes home from a business trip by how many “sleeps”.  Let’s do one from finance.

In options trading, models assume time passes linearly but we know market volatility is lumpy. It’s concentrated on business days and even within business days, it’s concentrated near the open and the close. Not all hours are created equal. An option barely erodes on a Saturday but decays off a cliff after a stock reports earnings. Option traders adjust for this behavior by specifying a schedule by which “variance” passes as opposed to time.

If you think of an option as insurance, the value of the contract decays at a non-constant rate. By analogy, imagine having a Carribean travel insurance policy that you secure for a year. The value of that policy will remain fixed for the first 9 months of the year then plummet after the hurricane season. Time passed linearly but the risk that is being insured against decays rapidly as we progress through the storm season.

For the markets people, I want to screw with your X-axis. We are used to seeing time series as a function of hours, months, years and so forth. Quant fund manager (and fellow Cornellian or “corndog” as wifey refers to us) Corey Hoffstein considers tracking prices across potentially more relevant domains than time. In his paper, he writes:

Information does not flow into the market at a constant rate. While time may be a convenient measure, it may actually cause us to sample too frequently in some market environments and not frequently enough in others. One answer may be to transform our measurements into a different domain. Rather than sampling price based upon the market close of each day, we might sample price based upon a fixed amount of cumulative volume, trades, or even variance. In doing so, we might find that our measures now represent a more consistent amount of information flow, despite representing a dynamic amount of data in the time domain.

I’d be excited to find such charts on Koyfin but I’m pretty sure I’d die holding my breath.

Memories As A Unit Of Time

It turns out that when I graduated from high school, I had already used up 93% of my in-person parent time. I’m now enjoying the last 5% of that time. We’re in the tail end.

Well, that’s a splash of cold water.

Tim Urban uses stick figures to shows you several “tail ends“.  The visual is a sticky reminder: time is precious. And like land in NYC, you aren’t getting any more of it. So as real estate folk like to say, let’s see if we can build “up” and improve the time we have.

To do that, we must first understand our dual selves and how time passes.

The “experiencing” self vs the “remembering” self

Daniel Kahneman’s research exposed a duality in our perception of the world. How you experience the present versus how you later remember it.

Consider a study in which people recount their experience of a colonoscopy procedure. It turns out that people’s memory of the procedure is uncorrelated with its duration. The best predictors of how they would later report the experience:

  • The maximum pain they experienced
    • This is now known as the “peak-end rule” in which we judge an experience by its most intense point. In other words, don’t rip a band-aid off quickly.
  • How they felt towards the end of the procedure
This work is a glimpse into how our minds automatically compress experiences for storage.

For more, check out Kahneman’s awesome TED Talk “The Riddle of Experience vs Memory”.

Then consider the question, “would you pay to go on a vacation if there would be no mementos or memories of it?”

Time Dilation

Parents have heard the line, “the days are long but the years are short”. We all know a trip to the dentist or drinks with a friend can both be measured in hours, but a deep cleaning with that metal hook has a funny way of stretching time. An especially perverse distortion is how time seems to pass faster as we get older. Recently, my 6 yr old gets stressed when the schedule is full and “he won’t have enough time to play”. I can’t help but feel some loss of innocence when he acknowledges the scarceness of time. That genie doesn’t go back into a bottle.

Young children actually act like there’s infinite time. Wait for them to put their shoes on at the front door if you don’t believe me. The reason for this is novelty. Everything is new to them. Both engrossing and distracting. Just imagine what the world becomes when you start to read. Suddenly everything from a street sign to a scoreboard is a curious game or challenge often leading to the incessant “why’s”. Adults seem deprived of that level of wonder.

As you get older, you are on autopilot. Here’s a first-world example. Think of how airports curate museum-like exhibits just to keep you amused (SFO has displayed electric guitars and vintage boardgames to my delight). Does a building which triages the miracle of humans crossing skies in reclining chairs with satellite TV need any more bells and whistles? Yesterday’s breakthrough is today’s background noise.

An incurious adult will cruise through life and wonder where the time went.


We have a “remembering self” which doesn’t faithfully record every moment as if it were a GoPro. Memories, not minutes, are our mind’s basic unit of time. Throw in the fact that clock time is a house of mirrors and we are left with a prescription:

You don’t want to slow all time down. DMV visits are long enough. You just want a timeline with more spikiness. More highlights sewn together is not just life but actual living. Maximizing interesting experiences per year. Everyone’s definition of interesting will differ but a fuller personal reel is the way you actually want to slow down time.

Tips to do this:

  • Kill auto-pilot. Small interventions will do the trick. Take a hike or a trip to the library. Mix it up. The more you experience the more frames your memory snaps.
  • Be more like a child. Stimulated. Why travel? When you are in a new city or country the foreign flavors, customs, people, and scenery turn you into a kid again.
  • Experiences > stuff. Fancy stuff becomes background noise quickly.
  • Be mindful that the “remembering self” directs our decisions (“that root canal really sucked, I’ll floss 2x a day now”). That means the way we encode our experiences influences our later actions. By cultivating memorable inputs, you directly guide your future. Your past behavior trains your future behavior. To quote James Watson (of “double helix” fame): “Avoid boring people”. Be careful, his quote intentionally has a double meaning.
I drew a lot of inspiration from this interview titled Wish You Had More Time? What You Really Want is More Memories. A lot of what we take for granted about being pressed for time is debunked. It’s full of surprises and good tips.

My favorite highlights:

  • How people think they spend their time vs how they actually spend it
  • Are parents spending more or less time with kids now compared to 60 years ago?
  • Are you really sleep deprived?
  • Why you probably have more leisure time than you think
  • What’s the difference in people who don’t feel starved for time?
  • How can thinking about yourself as three different people allow for more and better memories?

He Will Teach You To Be Rich

Most of the personal finance gurus that have gained mass popularity will give you sound advice. They all promote saving, avoiding credit card debt, and explain interest rates and taxes. I like to ankle-bite entire sections of Dave Ramsey or Suze Orman’s advice. Rich Dad Poor Dad is more of a charlatan but even that blind squirrel is able to find a nut and say some things of value. I won’t waste time nitpicking them here. Instead, if you are interested in personal finance, I’d push you towards Ramit Sethi.


The easy part of money is the technical details. All the gurus get that right. Online calculators are abundant and free. As I showed, money is complicated because of psychology. Money planning can feel like torture so people put their head in the sand. This is where Sethi’s edge comes in. With a keen understanding of psychology, Sethi frames money decisions in ways which invert the trade-offs so that instead of making you feel deprived, you can’t wait to follow your plan.

Some of his best insights:

  • Identify your “invisible scripts”. These are beliefs that are so deeply held in our culture that we don’t even realize they’re beliefs.
  • By focusing on what you love you are forced to pinpoint what money means to you. For example, if you want more money to increase some vague sense “security”, it’s worth unpacking this feeling. Security is one of these concepts that will eat you whole. You’ll never have enough. This pull towards some unattainable, undefined goal will affect your risk tolerance and ultimately your well-being. Sethi will help you dissect it. When you forget that money is a tool, not a goal, every decision becomes a monetary one. That would be like living without depth-perception.
  • That approach leads to his concept of “money dials“. Introspect then ruthlessly cut spending on things that don’t matter to you. So many things appear to matter until you dig deeper. Not to mix gurus, but Marie Kondo this. For the things that do matter, here’s a new idea — think about you could achieve spending 10x or even 100x on it. Reading about “money dials” feels like emerging from a cave. Imagine implementing it.
  • Sethi gives practical advice for automating your finances. Instead of hyper-focusing on budgets, which isn’t behaviorally sustainable, he shows you how to not only think in more flexible buckets but automate the process as well. A huge upgrade to your odds of adherence.
  • Stop fighting with your partner over $5 coffees. If that’s something they deeply enjoy respect it. Focus on high impact decisions. He inspired my matrix. You are guilty of “bikeshedding”. Quit it. 
If you’re interested, don’t let his book title deter you. It’s legit. You can also start here:
  • YouTube interview
  • He was recently on Tim Ferriss’ podcast (link with notes). The discussion on prenups is interesting and the money dials are fun to hear.

Your Money Says Too Much About You

At first grade open house, Zak’s teacher had a striking way of reminding us to slow down and smell the roses. She recounted how a dad once asked her “is my son Stanford material or Oregon St?” The father was wondering if he had a blue-chip stock on his hand. Let’s be charitable to this guy and presume a teacher sharing a parable might sacrifice some context for a more potent delivery to her current audience. If the guy was subconsciously pricing his son, our outrage should be at how common this is in our culture.

Have you ever Zillow’ed someone’s house? Do you notice that when you type a person’s name in Google one of the autocompletes is always “net worth”?  Just consider the language: “net worth”. On average we measure people but what they accumulated.

How does this happen?

In Sapiens, Yuval Harari tells us that humans’ unique ability to coordinate has been the source of its triumph. Coordination lies in our ability to share stories. Money is one such story. Economists refer to money as a construct for settling “the double coincidence of wants”. To use hokey econ examples, a farmer can trade with a cobbler even if the cobbler doesn’t need corn at that exact moment. Money is the symbol of each of their efforts. Money’s utility is it allows us to reduce services, talents, and goods comprised of many features (utility, quality, aesthetics, convenience, scarcity) into a price. The price modulates to allocate demand to a populace according to their preferences for those features. By compressing a lot of information into a number we achieve liquidity.

This compression is no free lunch. Consider the word “powder”. In some contexts, it’s a reasonable label for either sugar or cocaine. But if you are carrying powder while standing in a security line as the canine approaches, you’ll wish you didn’t collapse the breadth of the powder’s traits into such a low-resolution summary term. If you compare 2 different job offers with the same powder (salary) you are gonna want to get more granular. The compression leaves out critical info. When we use “net worth” as a proxy for societal contribution we are being lazy with a low-resolution term.

The most important feature we sweep into a number is emotion. Like a prism, a single price emanates rays of envy, admiration, desire, disdain to its observers. Both a car and handbag can cost $10k. The colors spreading out from that single price are different shades to each gaze fixed upon it. So now imagine what happens when we summarize people with a number. The gap between their qualitative value and their actual net worth can mercilessly control that person’s outward-facing narrative. The QB who signed the big contract who turned into a bust cannot be left alone with his failure but is now also called a ‘bum’. The critically acclaimed saxophonist that has to tutor to make rent is labeled ‘underpaid’ and granted a halo of virtue. We may know nothing about these people other than the gap between output and income. What’s given vs what’s deserved. Capitalism may be the best arbiter but don’t confuse the map with the territory.

Whether one cannot stop spending or has first-gen-immigrant money security issues, it’s no wonder people have a complicated relationship with money. The magic of money’s symbology cannot be fenced in enough to stop it from conveying that which it is unqualified to do. It’s like asking a compass to measure your elevation.

Your money says way more about you than it deserves to. Rich or poor.

Flirting with Models: Wayne Himelsein


About Wayne: CIO of Logica Capital



Every trade is implicitly long or short volatility or optionality

  • There is variability in every asset and its distribution dictates whether you are long or short.
  • Every trade is either a bet on convergence or divergence. Convergence trades are short volatility

Quant vs Discretionary

“There’s good and bad in all of it. So the best you can do for yourself by going with what you know because you’ll be able to ask better questions and be more comfortable with what’s happening day-to-day.”

  • Myth of quants building a black box then “going to the beach”

“The market is always changing. In fact, it’s funny even the idea of factors and categories, if you think of something like value and growth. These two big facets of the market, even those are evolving. [Consider] that you buy a value stock, and it turns around and starts moving in your favor. Well, now it’s a growth stock. So literally, the categories are changing on us. So if you bought a value book, and you leave it for six months, you’re now a growth book, if you were right on your picks.”

  • Using quant to “mechanize” what works vs mining for patterns

“Finance algorithms that developed from logic and experience that simply seek to mechanize what is already well understood, have a chance at success. Those that begin in data analysis, categorization, quantification, or statistical or numerical gymnastics do not.”

Opportunities in volatility trading

Traders have different “assumptions across the volatility surface, the strikes up and down and across the calendar upwards and outwards, There are different prices for every option. Because of all this modeling and people having demand for different options at different calendars in different strikes, there’s going to be cheaper and more expensive….Take advantage of the weirdness and pricing and model variants across the option surface.”

An inverse relationship between signal strength and opportunity size

  • As your signal strength declines you need to diversify more. “To have more probabilities repeated more often, [so] more positions”
  • Hoffstein: “Information ratio is equal to your information coefficient times square to breadth. If you have to lower your information coefficient, but your breadth goes way up, you can actually end up with higher information ratio”

Re-phrasing a bit: expectancy scales with number of trials but volatility scales with square root of number of trials. If your bankroll is large and your business diversified, it follows that your focus should be on hunting for high expectancy games, not minimizing risk.

Evaluating a strategy

  1. Use daily returns to get more data points. Monthly returns mask too much.
  2. Are you achieving your premise?

    “So you’ve said yourself, I know where I want to neutralize, and I know where I want to get my alpha. And if that’s where you get your alpha, you have to know that number one, you have alpha there. So if you look at your growth tilt and measure that against Fama growth factor, do you beat it? If not, you’ve got no edge.”

    • Map the strategy.
      • Compare the exposures to time series of different exposures to see how it behaves. This requires using mathematical tools that do not rely on linearity (ie regressions).
        • “I don’t ever listen to what [the manager] tells me. I just run it versus we have in here about 180 different exposures that we have time series for factors or exposures [to find out] “what is inside this thing?”
      • How intentional are the exposures?
        • Managers will tell you that they’re doing something but don’t even know what they’re exposed to. “Did you know you have a 30% exposure to momentum? Oh, no, I didn’t. I’m actually a value investor.” (Me: sounds similar to performance attribution frameworks behind “hedge fund replication” strategies)


Beta is a poor quantity to use to balance your portfolio

  • Beta equals correlation times vol ratio
    • It’s easy to compute which makes it popular
    • …but since its inputs are non-stationary, non-linear and themselves volatile it’s garbage in/garbage out.
    • Important to understand if a beta-hedge portfolio will bleed longer or shorter as correlation increases. (Me: This is why gross exposures are important to constrain)
  • How to balance a portfolio without relying on beta?
    • Geometric approaches that account for non-linearity
      • Clustering distance approaches
      • Stochastic dominance

Market neutrality is a “funny” concept

  • What does it mean to even be neutral?
    • “What do you want to be neutral to? Are you directionally neutral? Are you factor neutral? You can [initiate] a directionally neutral portfolio that has equal long shorts, with a complete growth, tilt, or a value tilt or some other factor tilt like a volatility tilt.


“If we find a good pair trade, rest assured, many others have found it. And there’s just gobs of computing power, and PhDs and all the rest doing the same thing. And so we’re all going after the same edge. When things start to go wrong, the differences between the different groups is that they manage the risk differently. And one of the best means of managing risk in these markets [is to manage leverage]. The overcrowding risk is that everybody’s in this trade, and it’s a good trade. That’s why everybody’s in it. So you’ve done the right thing. But as some of these bigger shops start to unwind, it becomes everything going the wrong way. Others are needing to exit because they have LPs to answer to or they have risk that they’re managing to, so as long as you’re in it, you’re exposed to that. And it’s difficult to manage because at the get-go, you made the right bet.”

Walking away or sticking with a “broken” strategy?

Difficult question since the pricing may be more favorable as anomaly gets stretched but unclear whether the relationship will revert and on what timeline. There’s career risk is sticking with it vs the weight of the historical evidence for the opportunity.

“The more your measure won’t determine whether something’s out of favor, the more time you might give it to try to fix it”

“Comes down to a personal decision. How much time am I willing to spend tweaking and contorting to try to figure out whether I can fix it. And we all have our limits. It comes down to a business question as well. It’s not just tweaking and contorting and trying to fix it. But how much time can you spend defending it? How sticky is your capital? Even if it does come back still be in business?”

An easy example was the trade that shorted both the triple long and triple short ETFs on the same reference asset. The trade was over once the cost to borrow the shares exceeded the edge in the trade. This was easy to measure and therefore abandon when it became too crowded.

Hedging non-linearity or skew

  • “The only way to get rid of the left tail is to balance it with the right tail. And to have that obviously, you have to have the right offset temporarily. You need the time association to match that when this thing goes down, the other thing goes up. So you need to understand the time relationship between the two.”
    • Stop-losses are “synthetic left tail mitigator”. They are not fully reliable because of:
      1. Gaps
      2. Discipline
    • Tradeoffs between hit rate and cost of the hedge. Need to define what type of exposure you are ok with to target the right option hedge. Just like insurance has cost levers like premiums, coverage amounts, durations, and deductibles options portfolios can be custom tailored.
    • Flight to quality assets like gold, USD, treasuries in a permanent portfolio
    • Managers who engineer defensive market-neutral portfolios

Final words on hedging

  • Depending on the nature of the crisis hedges behave differently. Since we cannot predict the nature nor timing of a crisis it’s best to be diversified across hedges.
    • “Back to the larger insurance analogy, you have your medical and you have your dental and you have your vision. And so I don’t know where I’m going to get hurt. But either way it’s covered.”
  • Tolerating the cost
    • “Optionality being potentially the heaviest cost again, to me, it’s not expensive when you get what you want. But since it is more often a bleed than a payoff, perhaps people should have more treasures and gold and a little bit less optionality. But definitely all concurrently.”

Thought experiment

You can only own 1 asset and never trade it again, what do you pick?

SP500. The only reason people underperform the market is they want to control volatility and liquidity needs. But if we remove these concerns the best thing is to just own the market in perpetuity.

“But it’s a dry heat”

It crossed 100 degrees a couple times this week in the East Bay. It’s a dry heat. If it’s 100 degrees with no humidity, what temperature do you think that equates to if you had 75% humidity?

About 80 degrees! I know this because I coach Zak’s soccer team, so I learned about the “heat index”. It basically allows you to compare desert heats with NYC-subway-platform-in-August-heat.

This chart is courtesy of NATA

I think I forgot what humidity feels like. This shows that 70 degrees with 90% humidity has a higher heat index than 102 with no humidity.

Finally, if you are in HS it’s two-a-day season. Good luck with that.


I was curious so I did a super dirty scatterplot of state heat index vs midpoint rate of each state’s income tax rate range. The R-squared is zero. Nothing to see here.

source for calculating heat index: NOAA and CurrentResults
source for 2019 state income tax rates: Money-Zine
(If interested I can share the details of how I compiled the data. Like I said, it’s dirty, but a more accurate approach in the same vein is unlikely to yield a relationship. I have ideas for other approaches that might, but I’m skeptical there’s any relationship here after seeing this. I thought to do it b/c I’ve heard CA people think higher state taxes were somehow justified by the climate. My gut response from my open-outcry floor days is a double-tomahawk overhand sold!)