What the Market Crash Says About How Investing Works

Tracy Alloway (0:05)

Hi, Odd Lots listeners. Joe and I are working our way through a pretty big backlog of episodes. So what that means is what you are about to hear is something that was recorded quite a while ago. We recorded this one back on March 23rd. We were in the midst of the big market crash back then, but we hadn't really seen the effects of that crash work their way through the financial system. So you're gonna hear Joe and I talk a lot about how weird it is that we haven't seen any big trading blowups just yet. Of course, since March 23rd, we have had a few, notably a big oil fund in Singapore and also a hedge fund called Malachite in New York.

I think if anything, it makes the episode more interesting and the themes discussed probably more prescient. So hope you enjoy. Thanks for listening.

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

Joe Weisenthal (1:25)

And I'm Joe Weisenthal.

Tracy Alloway (1:27)

So Joe, you know what I've been thinking about quite a lot recently?

Joe Weisenthal (1:34)

I don't know, is it the same thing that literally everyone across the entire world can't stop thinking about and dreaming about and talking about, or is there something else going on?

Tracy Alloway (1:44)

Wait, are you thinking of the virus or the market sell-off? I think I've been exposed to financial markets for too long because they're sort of both entwined in my mind.

Joe Weisenthal (1:55)

I literally dreamed last night about both the virus and the market crash, and I have not thought about anything else. But no, what is the specific thing that you yourself are thinking about these days?

Tracy Alloway (2:08)

Okay, it's kind of an offshoot of the market crash, and it's basically investor blow-ups.

Joe Weisenthal (2:17)

Okay, that's timely.

Tracy Alloway (2:19)

Yeah, so one of the interesting things about this particular sell-off is we still haven't seen a bunch of investors really get taken to the cleaners just yet. We've had a few, one of our Bloomberg colleagues wrote about a hedge fund in particular, but you can imagine with everything that's gone on in the markets, you're going to get more and more of these stories emerging.

Joe Weisenthal (2:46)

Yeah, I mean, it's the things that things are moving so fast right now that even by the time this recording comes out, we might hear a lot more investor blow ups. And the one of the reasons I think we will, and one of the is because we've been seeing, you know, like so many tried and true strategies in the last couple of weeks have just completely failed, essentially, so various hedges that investors use to mitigate volatility in their portfolio, whether it's treasuries or whatever, haven't behaved the way, all kinds of dislocations. So A, we're almost certainly going to get those blow ups, and B, I think the conditions are now in place from the intensity of the moves that we've seen in recent weeks that will sort of finally cause some of those shoes to drop even beyond just the sell-off, so to speak.

Tracy Alloway (3:43)

Exactly right. And a lot of those strategies were things that people supposedly had piled into, like selling volatility or risk parity, where you're sort of relying on the inverse correlation between bonds and stocks.

All of those seem to fall apart in the recent sell-off. So my question is, if you're a professional investor, like a hedge fund or a dealer or something like that, what separates you from the crowd when it comes to your investment strategies? Because like I said, it feels like a lot of people had sort of just crowded into the same thing in recent years.

Joe Weisenthal (4:21)

Yeah, it has felt like that. And it also is, it's been this puzzle. And I've certainly like thought about this since well before the crisis hit, which is that on the one hand, you don't want to just pile into the same strategies as everyone else. Everyone knows that.

That's not particularly desirable. It's hard to stand out. On the other hand, for essentially the last decade, we've had this situation in which the winning strategy is to go all in on high beta and shorting volatility. If you did anything other than that, essentially for a decade, you face this situation.

And you have to write a quarterly investment letter to your clients to explain why you underperformed yet again. So there has been this real pickle where there's been one dominant strategy for so long, and if any deviation meant you probably were underperforming.