JOHN VINCENT: What we're looking at is a portfolio that gives us the biggest edge. It's not saying, well, gee, we want to have 10% in fixed income, 15% in FX, this amount in equities, certain amount in commodities and a certain amount in Bitcoin. It's really looking at the global landscape saying where do we see that our primary research is saying that there are edge or where do you think there are opportunities and what is the best way to express that?
SAM JERNIGAN: We're trying to construct a fund that allows us to take advantage of this underlying force of decentralization that's emerging in the macro and the global economy.
MIKE GREEN: Mike Green, I'm sitting down with John Vincent and Sam Jernigan of Wakem Capital. Now, Wakem began out of the private family office. Mike Novogratz, who's well known in the crypto space and the two of you have primarily built a discretionary global macro strategy that takes a somewhat unique focus around cryptos, but not exclusively but that is what you have been working on for the past couple of years, primarily built around some of the thoughts that have come out of the IMF and others in terms of the role that crypto may play in financial assets going forward.
JOHN VINCENT: That's right. I think, on a big picture thematic basis, the idea is that we were reimagining what global macro will look like going forward in a decentralized and digital world. In that framework, we think that Bitcoin and crypto actually has a place in there and you mentioned some of the papers that came out in the IMF, there is now some academic rigor that seems to be backing of a little bit of what we thought from a big picture macro thematic basis.
MIKE GREEN: John, your background is in discretionary global macro. You were at Graham Capital and before that, you were at RBC, Salomon Brothers. You did something interesting. You took a break and you went, took some classes at Princeton particularly focused on this idea of what is blockchain? What is crypto? Can you talk a little about what inspired that?
JOHN VINCENT: Sure. The truth is I was sitting up at Graham and we were in this very low vol FX, low vol fixed income, about 60% of the world's central banks were at negative rates and I was trying to figure out what will gold-- what will store of value look like going forward? Princeton was offering this class in blockchain technology and so I basically signed up for that. It started out-- a friend of mine Joe Lubin was one-- with Vitalik Buterin, was one of the original builders of Ethereum. He had an office down in Bushwick, Brooklyn, [indiscernible]. I was like, look, I want to understand what's going on in this digital space.
As I say, I'm a macro guy, and I'm looking at the world and thinking that we need other stores of value out there. It's very difficult to look at a world where you're paying money to put cash up, which is what we're seeing in Germany, Switzerland, really across the globe. That's what sparked my interest. It's interesting, as Sam came about it from a slightly different angle and that's how things have worked pretty well between us as we came about it differently and recognized the opportunity set, even though we're not coming from the exact same spot.
MIKE GREEN: Well, and you and I met through Sam. Sam and I have known each other for a number of years. You used to be at Argonaut and after that, you were with Graticule for a while in Asia. You've always struck me as somebody who's willing to approach the world from a very nontraditional standpoint to ask the questions and I believe very early on, you're at Bear Stearns. You were one of the guys that identified the mortgage dynamics. That's when we first came into each other's window of knowledge. What brought you into crypto? How did you decide that this was something you wanted to focus on?
SAM JERNIGAN: It came on my radar in 2013. I missed the story in 2013. At that time, the narrative misled me to some degree. The narrative was a continuation of the Fed's printing money, there's going to be hyperinflation, I never believe that. I believed that QE would not be that effective, and that deflation was more a threat at that time than inflation. I viewed it more as a very interesting technology.
I was very busy obviously, building a firm and had a job focused on assets that we can trade and so it was more a fascination than anything else. I was speaking about at the time with mainstream economists who were fascinated by this new technology. It wasn't really until 2015-2016 when I was at Argonaut, and we were betting against the Chinese RMB and particularly contacts in Asia that we would speak to, they would tell me, look, the Chinese billionaires, they still want dollars and an insatiable appetite, but they want Bitcoin more.
I think this chart has been floating around now. Kyle Bass has shown in a few times, but that's what I was looking at every day in 2015-2016, was over the course of call it 18 months, we were playing for a 3% window in dollar-CNH with super large notional dollar sizes, a move that ended up moving being about 10% and Bitcoin went up 470% of that same window, and it was just this insatiable demand to bypass capital controls and get money out of the country, and I remember saying to people, we got the wrong trade on. We got to buy this Bitcoin. Because as a macro trader, when you have all these different tools, you're always saying what's the best tool to deploy for the view? Of course, at that time, though, that wasn't a tool where we were constructing.
MIKE GREEN: This is a challenging, dynamic, because in part, all of us have been brought up in an industry in which bubbles have been the omnipresent feature for the past 20 years, and so anything that goes up 400% or 1,000%, or 2,000% certainly takes on characteristics that cause you to scream tulips.
SAM JERNIGAN: Here's where I would connect the dots to how-- for John and I, which was after leaving Graticule, again, when you're on Wall Street and you have a job, you don't have a lot of time to explore things outside of what's going to make you money and but I had a non- compete, had some free time that I was forced to take. I started looking into this and a friend of mine at the time that's in Durham, who was a former head of monetary affairs at the Fed, was then a special advisor to Christine Lagarde, he's now an official advisor at Wakem.
He had done an analysis that effectively showed that Bitcoin, contrary to the presumption, he went in with had bumped out on the efficient frontier as it was not a reach for yield, it was not a speculative bubble, so to speak, in an isolated sense, that there was something more going on here and that in fact, it was uncorrelated to both safe and risky assets.
MIKE GREEN: Let's push on that for a second because part of my understanding of how that type of analysis emerges is that we look at a trading history and we say this is telling us that price action says this is uncorrelated in some manner. That this is the magnitude of the moves, offer diversification benefits that wouldn't require you to put on additional leverage, for example. You could have done 50 times as much CNH and you would have completely blown up in the spring of 2016 or 2017 to be more precise, I'm sorry, and tried to replicate Bitcoin's returns, but that that was really not something that was available. That's effectively what Benson's work would've suggest that it's a separate asset that occasionally overlaps in terms of correlation, but has its own dynamics and therefore has a role within the efficient portfolio.
SAM JERNIGAN: Basically, at every level of vol across the entire distribution, so whether it's 1% or if you're targeting a 15%, at every level, it increases the efficient frontier of a portfolio.
JOHN VINCENT: It's not correlated with any other assets. In addition to not being vol dependent, it is also not-- as if it's correlated with certain assets that would go into certain buckets, it's uncorrelated with all other assets.
SAM JERNIGAN: I think, and the paper will be coming out shortly, but I think a couple of the other notable items is one, it shows that there is a benefit to active management over passive. The other is that even for very conservative traditional portfolios should have a little bit.
MIKE GREEN: Well, I think that's a really interesting dynamic because if that is true, unless it facilitates the addition of leverage to the portfolio, i.e. is risk reducing, it has to replace something. Something has to shrink in its allocation in that efficient portfolio unless the volatility dampening is such that you can add leverage to the portfolio. What's the asset it's replacing?
SAM JERNIGAN: My answer to this is a little bit broader. I'll let the-- I don't want to fully-- I'd prefer to tease out rather than fully break it out. The short version is as macro managers will trade coffee or cocoa or wheat. I guess my question is--
MIKE GREEN: That's just with our children.
SAM JERNIGAN: I guess the question is that if you have macro managers who are otherwise replacing some aspect of some other asset, either safe or risky, with trading wheat, why aren't they trading Bitcoin? I would argue that there's a much stronger case that a macro manager could make for trading Bitcoin than for wheat.
JOHN VINCENT: Yeah, I guess the only thing I would add is that you're looking at it as a zero sum game where really on the efficient market frontier, what you're looking at is a portfolio construction. Overall, it's going to have weightings and so it's not that weightings are constant at all periods in time. It doesn't necessarily mean that, well gee, you have to throw some something out of a portfolio. What it's saying is the additive of all together actually gives you a better outcome than even if you had everything you had in four but didn't have in it. It's not kicking something out per se, it's re-weighting the--
MIKE GREEN: That's really what I'm trying to ask, is where do you see the reduction in weighting? Where should that come in that efficient portfolio? How are you thinking about it within Wakem?
SAM JERNIGAN: Well, first of all, good question. We specifically have been focused on adding an asymmetry to the exposure so I don't think a lot of people realize this but there is an options market that while still nascent, is growing. There's a CFTC regulated and market now LedgerX, which we were pretty early participant in. ICE today opened their backed warehouse for futures, physical futures, daily several futures, and they will be launching, more than likely, options in the somewhat near future.
That allows us to further, I think, create some asymmetry where we're able to have the upside and not necessarily be reducing some other aspect of the portfolio. I would add to that, maybe the shorter answer to your question is, we don't allocate to asset classes. To be honest, playing with S&Ps this year has not been an easy task. I think that it's a bit like the elevator, escalator, elevator in S&Ps.
MIKE GREEN: With both happening at the same time right now, it feels like, yeah.
SAM JERNIGAN: To be honest, we just have not wanted to play in that market. The same thing can be said for Bitcoin. We're not going to maintain a Bitcoin, either at every level of S&Ps or every level of rates, or vol and FX, it's more about looking for the best absolute returns rather than allocating to asset classes.
JOHN VINCENT: Really, what we're looking at is a poor portfolio that gives us the biggest edge. It's not saying, well, gee, we want to have 10% in fixed income, 15% in FX, this amount of equities, certain amount in commodities and a certain amount in Bitcoin. It's really looking at the global landscape saying where do we see that our primary research is saying that there are edge or where do you think there are opportunities and what is the best way to express that?
There are times when, right now, we see some real edge and expressing it via whether it's Bitcoin or cryptocurrency. There may be other times where we look at it and we think that, you know what, that is not the best way for us to be expressing that and we could conceivably have a portfolio that doesn't have any liquid crypto in there. It's just that right now, the option market, as Sam said, it's very nascent. There's some real edge to be had there. We think that penetration or understanding of this marketplace is still at a very, very early stage.
MIKE GREEN: I think that's unquestionable. One of the things you guys were referring to repeatedly, and it's part of the interaction that Sam and I have had repeatedly, you and I occasionally on this, has been the underlying dynamics of the volatility market associated with crypto. One of the things that you guys have done quite consistently is take the volatility in the asset class and engage in strategies like covered call writing or relatively simplistic strategies that with this level of implied volatility, can offer an extraordinary returns at.
JOHN VINCENT: Honestly, one of the things I feel like we're doing is we're helping actual discovery of what a crypto vol curve is supposed to be looking like right now. Yes, we are doing things like covered calls, but also, if you look at the shape of the vol curve as well, there are a number of factors for people who participate in the marketplace where they're constrained in terms of what they can do. A lot of it is-- Sam and I talked about this coming over here, a lot of people are cash constrained.
They're making decisions that are not based on the best pricing, but fit within the constraints that they have right now. We're not constrained like that. What we can do is we can look at where we think there's real edge and so people who are cash constrained will be willing to put on positions that are suboptimal, but fit what they have, and we're happy to provide the other side of that.
MIKE GREEN: Well, and this is one of the things that we saw, particularly as we looked at the dot-com cycle in US equities and I want to be careful in terms of drawing the analog to the bubble because there's clearly some overlap and there may be some meaningful differences. That's not my intention. We've definitely seen this in Bitcoin where the skew has largely been expressed to the top side. Calls have been more originally bid than puts.
To me, that says the people are engaged in exactly what you're referring to, John, which is people are trying to gain access to a market without necessarily having to go all in. They're seeking leverage having missed Bitcoin at 25, as my wife repeatedly reminds me, we're now looking at a situation where it's a relatively high priced asset, and people are looking for ways to either gain leverage or to gain limited liabilities.
SAM JERNIGAN: I think that-- I would push back on your push back, because I think even Larry Summers has said Bitcoin itself is a bit of a call, and so you would expect that the direction of skew of a call would be to the upside. It can only go to zero, it could go to fantastic levels. Look, I'll be the first to tell you that there are dynamics of Bitcoin, the deflation built into the system and frankly, the fact that a significant portion is held in very deep vaults that you don't have [indiscernible] that can make liquidity in a short squeeze. I do think that there is a dynamic to crypto or Bitcoin and the storage aspect that probably facilitates upside skew. I guess I would say it's like if Bitcoin is effectively a call, there should probably be a call on a version of the world that may not be quite so pretty.
MIKE GREEN: Well, my pushback wasn't actually so much pushback, it was just an observation. I would suggest I think that's right. If you have a call on a call, it should exhibit significant convexity or the top side is going to be far greater and you are basically seeking leverage on that expression. When you look at this type of opportunity, effectively, John, you were referring to it and saying, look, we have a capital base, we're able to own the Bitcoin outright and this gives us the opportunity to engage in strategies that in some markets would be perceived as yield enhancement, but really, when you have this type of feature, this embedded pricing of convexity to the top side, you're really almost playing a value investor game. You're-- I hate to sound pedantic on it, but that's the way I think it is.
JOHN VINCENT: I don't know that I would define it as a value investor. What I would say is that there was the knowledge base in the marketplace or in markets as a whole. There's a huge discrepancy there. In some respects, we're able to trade on the back of our understanding of the infrastructure we've put in place in terms of custody, and also our long background in terms of understanding what traditional vol curves and yield curves look like. I think that that gives us-- it just allows us to start from a different place because we're coming-- most of the guys you find in crypto trading are either technologists who have built the code, and they're brilliant, but they don't have much experience either risk managing a portfolio or constructing a portfolio.
There are very few players out there that are like us that have had over 25 years of managing and constructing portfolios. I just think that it's a different way that we're looking at the marketplace. My guess is at some point in time, you're going to see more people coming in and that that edge itself may change, but right now, it gives us this look at it out of all curve that is unique in my mind in terms of where we can be and where we can [indiscernible].
SAM JERNIGAN: I would highlight, though, vol is high now, coming over here, mid-70s. It was mid-90s a week or two ago, but October, November last year, Bitcoin at the money vol was 11. It was 17. I think at the time, it was 10 or 15 point below S&P vol. Yes.
MIKE GREEN: That was an [indiscernible]. It was shocking.
SAM JERNIGAN: Yes, which people don't realize.
MIKE GREEN: What was the reference price of Bitcoin at that point? I'm just trying to--
JOHN VINCENT: Right around the lows.
MIKE GREEN: Right around the lows. Okay.