Vineer Bhansali on Losing Fed Independence as the Biggest Tail Risk Right Now

SPEAKER_2 (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:22)

And I'm Joe Weisenthal.

Tracy Alloway (0:24)

Joe, I've been reflecting on this year. It's been a busy year.

Joe Weisenthal (0:28)

Yeah, go on.

Tracy Alloway (0:29)

In fact, we're recording this. We're on yet another trip.

Joe Weisenthal (0:32)

I know.

Tracy Alloway (0:32)

We're in Huntington Beach for this year's Future Proof Conference, which is-

Joe Weisenthal (0:36)

Always a fun time.

Tracy Alloway (0:36)

An event I always enjoy, but we have been on the road a lot.

Joe Weisenthal (0:39)

We have.

Tracy Alloway (0:40)

And I feel like the entire year is starting to feel very surreal for me. It feels just very different to prior years.

Joe Weisenthal (0:47)

Yeah, it does.

Tracy Alloway (0:48)

For many different reasons. But I was also thinking, one of those reasons is because it seems harder and harder to do portfolio construction nowadays. And I know that sounds really weird, given that markets are still at record highs and everything seems to be going reasonably well, even though we had that terrible jobs number. But if I think back to the big leg down that we saw this year, it seemed really scary because basically everything sold off at once, right?

Joe Weisenthal (1:16)

You know what I really like? I like how you started this with this philosophical thing. We're out on the road and all this.

Tracy Alloway (1:21)

And then I was like, how do I protect my portfolio?

Joe Weisenthal (1:23)

And I've been reflecting on the surreality of the times. And now we bring it around to portfolio construction. But no, this is true. And there's a couple of things going on. So one is the sort of like cross-acid class moves. The other thing is, and it's very related to that, I mean, it's the flip side of this, which is correlation breakdown. And then there is still this other element that I think is at play where at least, like, I would say there's two more things, which is that one, within US assets, the winners are still the winners, right? Especially a lot of these big tech names. So you haven't gotten the sort of secular.

Tracy Alloway (1:54)

And people have been talking about overvaluations for ages.

Joe Weisenthal (1:57)

Forever. And then the fact that, you know, you're not getting paid much to take on volatility risk or volatility measures are still very low. So there's a lot of difficult, unintuitive things going on.

Tracy Alloway (2:08)

And I don't even know what a tail risk hedge actually looks like at this point, because I would have thought like, well, obviously, maybe you diversify into long-duration bonds or something like that. But then in April, when we had the big sell-off, long-duration did not do that well either. So it kind of has me scratching my head about if you were worried about stuff, both literally and figuratively, perhaps blowing up at this point in time, what would you be doing? Like, what does a tail risk hedge actually look like nowadays?

Joe Weisenthal (2:35)

You like buy gold, that's already a record high. Yeah. It's confusing.

Tracy Alloway (2:38)

Yes. Okay. So on that note, I'm very happy to say we actually have the perfect guest to talk about tail risk insurance and just tail risks in general. Someone who's been working on Wall Street for a really, really long time and has a very storied career, lots of stories involving big names that you and I would definitely recognize. We're going to be speaking with Vaneer Bhansali. He is of course the founder of LongTail Alpha and again, has worked at many, many firms previously. We'll get into all of that. Vaneer, thank you so much for coming on Odd Lots.

Vineer Bhansali (3:08)

Thank you for having me.

Tracy Alloway (3:09)

So, I should just go ahead and ask you to give a sort of five-minute summary of your career, because it is kind of amazing. But the important thing is, you didn't start out as a trader. You started out as a mathematician.

Vineer Bhansali (3:22)

Yep, I started out as a theoretical physicist. I was finishing my PhD at Harvard. And this is 1991, the recession had just hit. I didn't know what a recession was. I wanted to be a professor, but my job evaporated because I was going to go work at the super colliders, the superconducting super collider that got canceled by Congress in the 1990s. I had a postdoc lined up in France, and one, I think it was in Texas, in Austin. And I got a call out of Wall Street, out of Goldman. They were looking for quants like me to work on options trading, or options model building, rather, I should say. So I went and interviewed, mostly because it was a free trip to New York. So I went there. Got interviewed by an elderly gentleman who was taking notes saying doesn't know any finance. For disclosure, I knew no finance. I had no interest in it. It was Fisher Black who was interviewing me.