Financial Products for Hedging with Vest Co-Founder Jeff Chang

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On the latest Masters in Business podcast, I sit down with Jeff Chang. He's co founder and president of vest. They are a firm that specializes in defined outcome investing buffered ETFs. They try and remove the uncertainty of outcomes of your investing by using options and derivatives to come up with very very specific products. I thought our conversation was fascinating and I think you will also with no further ado, my podcast with Jeff Chang. Jeff Chang, Welcome to Bloomberg.

Great to be here and thanks for having me.

Well, thank you so much for coming. I'm kind of always fascinated by people who have unusual or diverse backgrounds. You in particular US Naval Academy and then an NBA from Georgetown. Is that right? What was the original career plan?

So I grew up in Annapolis.

The original career plan was to be, you know, be part of the Navy, and unfortunately I got medically discharged for asthma and then then decided to pursue more of a business path. And that's what kind of led me to Georgetown, and then after Georgetown, I actually right after I actually always wanted to start my own company. Right. In fact, this is kind of a funny thing. Most people don't know this. I've never actually said this when I first started. I actually started a flat screen TV

Oh yeah, when they first came out, they were crazy.

Yeah, So I was in DC selling those. In fact, I remember selling TVs to Reagan National Airport. So when you like, look at what terminal you are back in the early two thousands, So those were Jeff Chang TVs that were there. I think another client was six Flags. Like when you the weak, how long the week?

Yeah, yeah, exactly exactly.

But then, you know, as TVs became further and further down, I was like, hey, that's not.

The business I wanted to be in.

We'll commoditized. I don't want to be there.

Yeah, all commoditized. So it taught me a lot about uh starting a business. On you know that in about life is that I realized that I needed actual hard skills that created a you know, value add And also the other component was I also realized that doing my accounting books, I didn't pay too much attention in accounting. So I actually, uh, for six months, went and studied for the CPA exam and took the CPA exam to be accounting.

Which was actually a twofold kind of reason.

I think one of my mentors has told me is that like, hey, there there is for the better word, there's few money and few skills. Right, you don't have that money, so make sure you build skills in which you're not always beholden to other people. And if you thought about it, that you know the two guaranteed things in life is death and taxes, right, And so in my head was I didn't want to be an undertaker, but I could take the CPA exam and sure that

So it's certainly a useful set of skills. But I'm going to assume the first business didn't fail because of bad accounting. It's just a hyper competitive market with razor thin margins and as stuff as economies of scale came out, that's right, the market just dies for that.

Yeah, And that really informed me is that you have to have an edge.

I think.

Over the thirteen years of founding this company, I noticed that there were actually key features that I noticed, even going through y Combinator, of my classmates and people that built very successful companies, they had very common characteristics for their success.

Right.

In fact, I had Asian parents. They optimized for intelligence, which was very u you know, you guess trade as you play the violin or the piano, and you kind of go through that.

They're optimizing for Ivy League admission is what you're.

Imploying exactly exactly, and or be a doctor for that matter.

It's so different Jewish.

Parents, Yeah, exactly so it was.

And then as kind of over the years, I realized that the optimization like if you know, when I have kids, because you know, I don't have kids, always none that I know of, but if I did, I would optimize for Actually number one is grit like that, and that grit is the not giving up, like like you know, your company fails, what's the next thing? Like you know, you pick up yourself from your bootstraps and you get

That is grit, And I.

Think resilience is more important.

And then the second is I realized that nothing in this world can be done alone, that success requires you to have partnerships, friendships, and know people that can help build great things. Great things don't come by yourself, and that's what I think. Second is influence, your ability to let people see your dream and believe in your dream. Think about this, like if you're starting a company, not

That's talk about like selling a dream. That's influence.

Like think about you know, some of the greatest entrepreneurs out there. They you know, you probably heard like Steve Jobs is a reality distortion field.

You know what that is.

That's influence, right.

That is one of the key things I think when when you're looking at business, influence is such a key thing of something that required to have success because, like I said, nothing in the world is done loan. This third, which comes back to my point, is creativity, the ability to spot things that other people don't see, right to basically be to see opportunity, to see things, to combine things together and have that opportunity. And then the last

So so I want to I want to stop you there for sex because I want to spend time going over y combinator. I want to talk about this, but before we get there, I mentioned the Naval Academy of such an unusual background, talk a little bit about what your experiences were like at places like Freddie Mack, the World Bank FBR, and pro shares. That's such a diverse set of experiences. Is what did you take away from that life experience and how did that ultimately lead you to launching your own.

From Yeah, so I could tell you one of the best things about what the military teaches you is not just teamwork and looking after the people next to you and really making a commitment. But there's also another thing is work ethic. Like I could tell you that I'm a morning person. I didn't grow up a morning person, but it's like five am, I'm up. And the funny thing is my girlfriend's a night person. She's like, how

The second is actually.

When I first started my first job at the World Bank, after trying to start my company, I had to translate energy companies in China, and I had two problems. Number one was I didn't my Chinese wasn't good enough, and secondly, my accounting wasn't good enough. Hence the CPA came and I was like, at least I got to learn one.

So I started to which by the way, he said, he is horrified because he thought this was a portionary tale and all it did was encourage more people.

To do totally totally reading that book really made me want to be you know what he said in the book big swinging right like everybody. It was just such a fun story. It almost painted Wall Street in a specific way, but it was just the interesting part. And by the way, it also got me into reading Foobozi about fixed income, about the mortgage market. And then I wanted to be a trader. So, you know, I studied

That has to be the big takeaway from eighth nine is that markets go up and down, and if you're leveraged, exactly, it's a problem. And if you're highly leveraged, it's usually pretty fatal.

Yeah exactly.

And you know, and disasters are are always clear in hindsight, right, And you you look back and you're looking at twenty thirty percent of fault rates, you're like, what that would that would have been so clear in your mind when you started to look at some of the data, And so that was really formative. And the other component is is kind of like what Warren Buffet says, you always

Risk management turns out to be more than just a phrase. It's really important if you're running other people.

Exactly, and it's something that you live and breathe and what I actually, you know a lot of our investment processes to try to get our clients to understand that, and you utilize kind of a lot of the tools that we build are basically pants like, you know, when the water goes out, and make sure that you have something there because of uncertainty.

That's to say the very least. So let's talk a little bit about that. You come out of this experience on a desk through the financial crisis, you launch vest Than twenty twelve. What was the motivator? What led you to say, Hey, I think we could do this better.

Yeah.

So I had a very short stint at pro Shares where I met my co founder Kuran Suit he worked on the structuring desk at Barclays, and we talked about, you know, like hey, let's start our own firm. And then our first idea was going to be you know, buffers like downside protection that we saw in the structure note market. And by the way, this actually segued into the mortgage crisis because in two thousand and eight, the

So I'll tell you a funny story. I was a market strategist out of brokerage firm in two to three and we got pitched a downside protected SMA and I was just sitting in a conference room hearing this pitch. What are the any questions? And I didn't ask the obvious question that I thought, which was well, great, the NASA's down eighty one percent, where were you five years ago? Who needs this now? But the question I asked and got called into the Corporate Council's office for was Hey,

Oh it is. It's a very real thing.

So we're going to talk little more about Vest and buffer funds in a moment, but I just want to get the timing right and talk a little bit about your experiences at y Combinator. You launch Vest with your co founder in twenty twelve, you join y Combinator in twenty fifteen. What led you to saying, Hey, let's let's see if we can hook up with the guys over at y Combinator.

Yeah.

So that's the thing in finance is there's not too much innovation, right because there's a lot of regulation and so on and so forth. And so even at our company, we we always even our identity today is still you know,

Yeah, exactly.

Because at the end of the day, is you know, we went four years with no income. Wow, right, like lived off our Wall Street bonuses me and my co founder Cronzu, Like we didn't get paid for you know, four plus years.

To found this company.

Like that's how much you have to the grit and the belief in something and that culture really really I think comes out of kind of startup kind of the Silicon Valley area y Combinator at the time.

Run by Paul Graham is it.

Paul Graham at that was the first year Paul Graham U stepped down and Sam Ollman when I showed Upcha was president of y Combinator. So twenty fifteen, twenty fifteen, yeah, Sam was president y Combinator. For the folks out there that don't know so why see, uh you know, similar to like a college application. You you thought an online college application, you actually don't need a company they help you form the firm and uh, you know, the companies

I don't know if this is still the case, but a couple of years ago the standard deal was something like half a million dollars for seven percent of the company, plus a three month program of building, iterating, pitching, et cetera. Is that more or less sound right?

That's right, that's the deal today. Our deal was probably close to one fifth of that.

Oh really yeah, well ten years ago, a lot of each over the last second.

And they have done a great job. I think they have maintained their I think the stat was since two thy twelve, twenty percent of the super Unicorns were funded.

By Y Combinator.

Wow, that's me.

And then like second place is like three percent and plus or something like that.

And this is like a full on boot camp where it's three months and they are really taking you through the process. Here's how you build a startup, here's how you iterate. When you first joined Y see, did you have any idea what the final product a vest was going to be or did that experience clarify what you want to do.

There were certain.

We went in with the idea of buffers and downside protection. There were certain pivots as far as like, hey, what's the best delivery vehicle to start with?

Meaning an ETF asposed to an.

S exactly exactly, But that was the foundational If you even look at our application and our pitch, it was exactly talking about the need for downside protection, the need to you know, fix liquidity and credit risk and other types of instruments. Those were kind of the foundational problems because YC always says that, like, make something that people want, and then don't just come up with the ideas. Start with the problem solving your solving, and the problem needs to be painful enough.

And so anybody out there that's ever thinking about starting.

A startup, always start with the problem first and make sure the problem is painful enough for your customer that that becomes you know, how you solve it can change little bit, but the problem always existed, and we thought that that was a noble problem to and.

Painful enough problem to seek.

That's a very customer focused approach to building a business. I don't know if Wall Street necessarily thinks in those terms. There tends to be an attitude of this is how it's been, it's been successful. Why do you think you're smarter than everybody else, smarter than the market. Like that's a sort of pushback you've gotten and that you tend

And that's where kind of the ethos of our Silicon Valley meets Wall Street is that we live in both worlds. Like our background me and Kuran's are Wall Street backgrounds. That there is no move fast and break things mentality on our Wall Street ethos, right, it is measure four times cut once. This is people's livelihoods, their their wealth. So that part we did not adopt, not like break things type mentality that is not hard to.

Do that when you're highly regulated.

Its exactly exactly second is that we also realized you can't do this alone. It's not like we're starting an Airbnb where we can just kind of do x, y and z. We needed partnerships. We needed like coming back to the point of influence, like we needed people that really could help us with innovation. Hence we actually only

Just like even with the exchange.

Wait let me roll you back. You said you only had two investors. Now today, now today, all right, So let's before we get there, let's let's talk about the post y combin interor experience. So they give you barely six figures for a small chunk of the company. They they take you through a boot camp that teaches you all these different things from focus on problem sovereign to iteration to pitching. Investors who were the early investors invest so.

We had our lead coming out of y Comedy was first Round Capital people an't familiar.

That's a great name if you're doing venture invests exactly.

They were one of the first investors in a small company called.

Uber that worked out them.

Yeah, they got a lot of big wins there.

And after that, you know, we had kind of a party round of a lot of different like Angels and other smaller vcs. But after that, that's when Cibo came in and wanted a bigger stake of the firm. But the whole y C experience was very much like the show Silicon Valley, right.

Which I which I just loved so great.

And to the point where like when we got to YC, we rented a hacker house by the way. House that we rented was called Hacker House and it was a one story building with like three bedrooms, not enough bedrooms for all of us that we're working there. I think Karan had to sleep on the floor on a mattress for three months. And by the way, this is coming from being over a decade on Wall Street. Like we're in house sleeping on the floor. Hey, there's nothing to

Right coming up, we continue our conversation with Jeff Chang, co founder and president of vest, talking about his experiences at y Combinator. I'm Barry Ridults, you're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridults. You're listening to Masters and Business on Bloomberg Radio. My extra special guest this week is Jeff Chang. He is the co founder and president of Vest. The firm manages fifty billion dollars in ETFs that are described as outcome orient investing.

Yeah, so I'm not sure folks out there. No get Lab sid was our group.

My no relationship to get Hub.

Yeah, but yeah, but get Lab was our I think they iPod on the Nasdaq. I think over five billion or something like that. They're doing really well. Uh, there's the equipment share was also our our batch.

A lot a lot of a lot.

Of big winners in our And by the way, you've probably been to college where you go into lecture hall, right and you have your first day class the first day of y C.

You know what they tell you.

They're like, you know, four percent of you guys in this room will be billionaires, right, you know, no intimidation factor By the way, that's the math, right, Like, on average it's a four percent I think right now is like I have to six percent Unicorn rate. But how many classes can you go through that? Like you're like, hey, h four to five percent of you guys are gonna have extremely successful companies coming out of clays And by the way, you look around, you're like, oh, man, is

Yeah, no, it definitely definitely sounds like it. We're talking about winners, but Silicon Valley, where's losers like a badge of pride? Yeah, Like it's hey, this is what's expected, which is very different than the way the East Coast tends to approach things. Tell us about that not being afraid to fail, not being afraid to try things, iterate and take this doesn't work, let's go with that. How different is that experience on the West Coast than what you experienced on Wall Street?

Yeah, I mean.

Definitely. In Silicon Valley failure is okay.

They have a saying if you're going to fail, fail fast, right, whereas I feel like on Wall Street is like, you don't want to fail fast, Like that's called a blow up.

Right.

So there are some parts, given the industry that we're in, we have to ignore some of the aspects of it. I think everything that we did, I wouldn't say was ultimate failure, maybe not the success that we wanted, because we wanted to make sure everything built were strong in foundation.

Right.

It would like last stand test the time, no matter what happened. Maybe not wildly successful, but then that that's how you pivot. So it's not necessarily failure per se, but not the success you're looking for them pivot and try to find other ways to deliver and how to solve the problem better.

But I still think that.

The idea of not being afraid of failure and that grit and the ability to you know, pick yourself up. It's that attitude that, like, you know, this is not the end. Failure is just the the mother of success, and you just have to keep learning from those mistakes because everything is a learning process. I can't tell you one person that I know that's successful that has not failed.

No, that makes perfect sense. You know, you you don't know what's going to work, and you don't know what's not gonna work until you try. And if you know the there's a story about Hey, if you're not failing occasionally, then you're just not taking enough risk to say the very least. All right, So so let's talk a little bit about how this developed. You come out of Y Combinator sometime in twenty fifteen. When did you first start taking client assets client money?

Well, NYC, we were taking client assets.

I think we launched our first mutual fund in twenty sixteen. It was the first buffer fund of its kind.

And then so.

Wait, let's stay with mutual funds, which have their own complications with capital gains tax. Given what you do primarily with derivatives and options in order to create that buffer, how does that play out in a mutual fund wrapper?

Yeah, there are obviously challenges that may not be as let's say, the same as like an ETF that you know. In twenty nineteen they introduced the in kind This is also another example of the partnership with Cibo.

It's been around for real estate for forever. It seems that's right, and it just took Wall Street a while to catch up to that explain what in clount incline creation and redemption looks like, what it means to you.

So in mutual funds there's a challenge in some cases that if there's a redemption, you would sell your securities, which could have the potential to realize gains. In ETFs not just unique to these ETFs or all ETFs, they have the ability to let's say.

In kind security.

So when someone wants their money back, instead of giving the market maker selling securities and giving them cash in some cases, you can give them securities, thereby not potentially realizing the gain.

For the shareholders.

So it has the potential for tax efficiency by having inkin now. Prior to twenty nineteen. October twenty nineteen, that was not we weren't able to do that with options that was introduced in October twenty nineteen, we launched our first buffer ETFs in November of twenty nineteen in partnership with our partners at First Trust, and so that has been one of the fastest growing areas, not just for our firm, but as the ETF industry as a whole.

So let's talk a little bit about what a buffer fund does, what are the advantages, what are you giving up in order to obtain those advantages. What's the largest funds? What's the largest ETF now at VEST.

So the largest buffer fund and the one at VES is BUFR. And it's built Yeah, it's built on the foundation that you know, the kind of fundamentals of the strategy is the buffer strategy, which is, you know, let's say you get SMP exposure for one year, the first ten percent is protected. So as an example of strategy, if SMP is down ten your flat for the year, and then you get upside up to let's say a

So years like twenty three and twenty four kind of unusual. You don't usually see twenty five percent two years in a row. But if you were in the fund in twenty two, down twenty two percent means you're only down twelve percent, that's right.

That's right.

So that's the trade off.

Yeah, And here's the thing is that most people don't realize these strategies have the potential to outperform the market, even if you're talking about you know, high double digit equity returns. Because think about this, in twenty twenty two, because of inflation, when interest rates went up, stocks and bonds both went down at the same time. Right, you could have mixed your stocks and bonds any way you wanted.

In twenty twenty two, sixty was negative exactly twenty.

And unless you were managing money forty years ago, you had not experienced inflation, right, And you couldn't hide anywhere.

I mean, you were like Tom Brady.

Choosing between alimony and child support while taking your kids jiu jitsu practice. Like the thing is, there was nowhere to hide, right Whereas if you were hedging. And the great thing about hedging is if you buy SMP and you buy an SMP put, that put is perfectly negatively correlated.

It.

And so imagine if you had a strategy that did not participate in the majority of the drawdowns in twenty twenty two, that means you had more to invest to take advantage of the games in twenty twenty three, twenty twenty four, and twenty twenty five. This is the compounding effect of winning without losing, right, It's the compounding effect of playing offense and defense at the same time, because the end of the day is a lot of times, you know, these types of strategies are not the get

Right.

These types of strategies are in the stay riche game because if if you have wealth, you just don't want to be poor, right, So that's why that's the kind of crux of protecting your equity exposure. And the idea is the issue with hedging has always been that to hedge with options and so on and so forth one of the biggest and they had surveys on why you know, investors and financial advisors don't hedge with options, and they

Right essentially created the field.

Yeah, the nudge, And I believe one of the studies by Cornell University had this study of I think they had kids in the lunchline. They gave them free apples, Like you get the end of that, you get a free apple right by the way, the consumption was like less than like, I don't know, twenty percent, Like it was a very low consumption rate.

No one took the apple.

Then they cut the apples up and they put them in little bags. By the way, the consumption went through the roof. Why this was the nudge. This was the idea that you make it simple, people will use it. Think about options as apples, and then that we had bag those apples to make it easier for the user to consume them without the compliance and scalability burden to them. Because theoretically any broker or any financial advisor out there

So let me ask you, because you've brought this up a few times, and I want to hone in on this is your target consumer, mom and pop mainStreet investors, or you focused more on the advisor channel or brokerage channel or all three some combination.

We are not that focused in the retail space mostly and by the way, I would say one hundred percent of our focus is in financial professionals really because those are our partners. Those are the people that we stand side by side with, we build products that those are the people we're solving problems for them, which they're solving problems for their clients. We stand side by side with the financial professionals and manage, you know.

And once you bring them up to speed, it's it's incumbent on them to find the clients that think are the right fit for this, and they get to explain that exactly.

Because every single client is different and unique. We make products across and every client is different and how that gets utilized.

We help the financial.

Advisor even you know, how to best build and achieve their client's investment objectives. But as far as the end client, that's typically not our customer.

So I mentioned sixty forty earlier. Does a buffer fund act as a substitute for sixty forty in other words, if you own whether it's sixty forty, seventy thirty, you own bonds for income of which there has been a lot over the past fifteen twenty years, but also as a non correlated asset with equity other than eighty one and twenty twenty two, does this and it offsets the volatility and draw down's inequities. Do buffered funds behave similarly to a sixty forty? Is that the thinking I.

Wouldn't say similarly. Let me give you a kind of a how we think about it. So if you look at let's say, a strategy of a ten percent buffer on SMP, in fact, you know there are indexes out there that track these. If you compare that to let's say, like a black Rock sixty forty portfolio, actually notice that the standard deviation is almost identical. Volatility is very similar right over the long term, but the source of the risk management is different.

Right you're actually hedging.

You're not hoping that the correlation between stocks and bonds, the negative correlation is there that you know, when my stocks go down, I hope my bonds go up kind of situation, right.

Well, historically they do most of the time. Yeah, they didn't in twenty twenty two, they didn't in nineteen eighty one, exactly, you know, So it's every forty years or so we seem to get this rork.

With inflation at you know, three percent. What happens if inflation rears its head.

Again rising exactly, You'll end up with the same issue the next time we see a serious exactly.

And this is why we say, why not diversify your risk management and hedge. So if I have one hundred dollars portfolio, and let's say I have sixty dollars in equity, forty dollars in fixed income, and let's just say I take ten bucks out, I put six, take six from equity, four from fixed income, I put it into let's say a ten percent buffer strategy in S and P. Perhaps the standard deviation of the portfolio could be very, very similar.

Is a very. It's not a very.

There's a non zero pity way above that.

Yeah, exactly what in your portfolio is going to save you if twenty twenty two repeats itself. That's the question everybody needs to ask. I always get the answer. Commodities, great commodities. It's a timing trade, right, you can get in it'll work. But when it's not inflationary, what happens to that trade?

I mean, you point out.

That gold didn't do great in twenty one or twenty two. It's only in the past few years where it's really exploded higher.

That's right, That's right. So I'm not smart enough to time that trade. And that's the great thing about these types of solutions is you don't have to time the trade, right, Like you're diversifying your risk management through just hedging. And like I said repeated again, this is the Stayerage game, right, how do we protect wealth, not like make exorbitant amounts of it, but protect wealth and get a decent return from people's wealth.

So buffer is ten percent hedged on the S and P five hundred. Tell us about some of the other ETFs, you guys, run.

So one of the kind of overall themes that we've seen in the market is, you know, the two things that really people are looking for is downside protection, but the other one is income generation. As the boomers are in retirement, the need for yield has really shown how high it is. I mean, if you look at the derivative income space, I think in twenty eighteen and the morning Stars ranked fifty eighth last year is ranked ninth

You can so give us a few ETFs that are primarily income focused.

Yeah.

So one of our biggest ones is UH UH K and G, which tracks the divin in aristaurrats our d v I which tracks the uh divin in achievers. These all provide uh.

You know, attractive level yield. I think.

So diven in aristocrats tend to be high dividends, low price. They tend not to be high PE companies, so they're fairly stable. Is that? Is that?

So the companies that have grown their dividend is created by S and P back in two thousand and five, companies have grown. They're diven in for twenty five consecutive years.

Wow.

And these are diven and growers. They're not diven in payers. So they typically I believe, you know, yield less than two percent. But they've grown. They're diven in for twenty five consecutive years. So for a company to grow, they're diven in for twenty five consecutive years.

That's a stable business.

Yes, And it has to cash flow. It's not a pe play right for all intents and purposes. It is companies that have to have strong notes. And the other thing that people miss is good corporate governance because who makes dividend policy The board for board to never cut a dividend for twenty five years. It actually was a filter for good corporate governors.

Now and that stock symbol is that ETF.

Symbol is KNG k NG, Yeah, and you.

Guys generate additional income on that with recover call writing.

That's right.

So if it's a two percent yield, what do you actually so.

Our distribution yields probably in the past year over eight percent.

Really that's a big number.

And we're on.

Average, I believe, covering around twenty percent of every single name. So you know, if I have one hundred shares of Walmart, I'm writing in at the money call and let's say twenty of those shares as an example to achieve that target income. So one of the things that core beliefs that we have when writing cover calls is like one of the biggest.

Drivers is stock selection. You pick the stocks you get good results. Right.

While you know the aristocrats they don't have the high flying mag seven names, right, but definitely as you look forward into the windshield, these are really going to be the names as the market bronze out right, Like I really do think in the next year, you're really looking at kind of a Barbell approach where you yeah.

You have the NVIDIAs in the.

In the high hyper scalers portfolio, but you really need to have the strong staples that cash flow.

What are some of the names in KNG.

What you got like Chevron, Walmart, like you're really blue chip names that are there.

I mean, look at Chevron.

They they have the potential to be, you know, one of the beneficiaries of oil in Venezuela right like they were, they were there before. And these are the cash flowing like crime like companies that like, like I said, grown, they're giving for twenty five second years.

These are strong, strong names that are out there.

You do you do anything with fixed income on the yield side as well?

Yeah, so.

We have cover calls on high yield tracking HyG gives you also a I believe a double digit distribution yield only covering about you know, twenty to twenty five percent of the portfolio, so you're still getting over you know, on a weekly basis seventy And.

What's that symbol h y T I heidi mm hmm.

Yeah.

And what about do you do anything on the commodity So.

We have gold IGLD, so you know, biggest not on goal has been a hunk of metal.

Since your portfolio doesn't do anything.

Now you can monetize the volatility and have you know, potentially.

Same process covered coal writ in exactly. So this is why CBOW is to partner with you. Guys. How does that relationship help you manage all of this option writing, all this all active.

That's a great question. So let's take eye Gold as an example. Right, prior to that fund, GLD options stop trading at four o'clock. By the way, this is one of the reasons why CEBO partner with us is how do we solve certain issues in the option market for the construction of funds? Right if options stop trading at four o'clock and I need to know the clothes, I can't create an ETF on that.

That's right.

S and P options, SPI options they trade, they close at four fifteen. Today, GLD options stop trading at four fifteen. By the way, that's a really cool statement to say that the entire street trades GLD options that extra fifteen minutes because we wanted that.

That's great, but that was you have you have to take the closing price at four and then use it for and we need that, they need.

That we need that option market to be open that extra fifteen minutes. And by the way, that that those products by for trust invests are the reason why we have an extra fifteen minutes to trade GLD option. So if you're you're late and you're trading at four or five, that's us.

And option trading is so much more complicated, so much more difficult. Like you, I started on an equity desk, but have always been a little bit of an option junkie because it's so fascinating and most people use don't use options correctly. They're just making like a lottery ticket bet, which tends not to be smart. You guys are using options for a very specific purpose to achieve what you describe as a defined outcome.

Solve a problem.

Solving a problem. Really interesting. Yeah, coming up, we continue our conversation with Jeff Chang, co founder and president a VEST. I'm Barry Ridults. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Redults. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Jeff Chang. He's president and co founder a VEST, the firm specializes in outcome oriented investing via primarily ETFs.

Yeah, so we have a strategy also target income almost I believe about a eighteen nineteen percent yield and you're still only covering about twenty percent. So that strategy tracks bitcoin, so you can get on a weekly basis, let's say you know, seventy eighty percent of the upside and bitcoin and then you know really high almost twenty percent yield

Well, no one can say that about bitcoin. It's always doing something going up and down.

Yeah, exactly.

And what's the ETF symbol.

For the ibit.

I'm sorry not that's black, right, yeah, yeah, DFII, that's.

Right, DFI. And so that's options. How much of the upside, how much of the downside, do you get and give up or is it just geared?

We're just writing cover calls on to target you know, a specific yield, Like I said, I think anywhere from recovering every week about twenty to twenty five percent and at the mind how every week every week, every Friday.

Yeah.

The reason why we like weeklies.

Is that when you sell a call, you want the premium to go to zero, right, that's right, and that decay accelerates in that last week if you're selling a monthly options, so if you like do it four times a month, you have the potential to generate more yield because you're always capturing that extra decay. It's like it's like football tickets, right, Like you ever go on step up like game times at one o'clock and you go on stop up at twelve, the ticket starts to drop

Kind of follows that.

In fact, there's actually only one thing that doesn't follow that, you know what that is go on Giants tickets, they decay before the season starts.

Well as a guy used to be in New Jersey for sure.

Or jets, tickets. Actually both of those are anominally there.

So really so in other words, bad assets don't generate good option that that's pretty reasonable. How often do things get called away? That's obviously the risk when you're writing calls. How do you manage around that? How frequently is that built into your models?

I mean, that can happen pretty frequently. But here's the deal, Like, think about this, and this is just a concept of let's say I collect a two dollar premium and the stock goes up one dollar. You're good, Yeah I made a dollar, but it's still got called away, but I still made a dollar. I just buy the stock back or however way I deal with the assignment, depending on the strategy.

So the idea is, as long as the stock.

Doesn't go above the premium, if I'm writing out the money or what I've actually.

Gives you a buffer to repurchase the stock, not at a loss exactly.

And this comes into what we call about the implied versus realized premium, meaning options. If I look historically of a particular asset, whether it be a stock or a commodity or whatever, and it historically moves X, I'm not going to sell the premium at that number to be plus, right, just like when you sell car insurance, Like if my expected loss is one thousand dollars, I'm not going to

So in options, they have.

What's called the implied versus realized premium, And so that's really kind of where you're trying to capture, is the implied volatility versus what the realized volatility, And you're hoping that the implied will be greater than the realize. I mean, that's the hope and option, especially when you're selling them, all right, I think there's a stat that, like, you know, sixty percent or seventy percent of the time, the person selling the option wins the trade, right right.

Most you know, old option traders don't die, They just expire worthless. Yeah, is the exactly that's joke. But you know, if you're a writer of options, you're making a very specific bet, and if you're a purchase of options, you're making a very different bet.

Yeah, yeah, I mean you see this.

Uh, you know, in some cases the buying options is like you said it can you know, even warm Buffet said there could be weapons of mass destruction.

I mean you can see these zero day options that.

People are buying, and that's become crazy.

I mean those are like scratch off lottery tickets, right, who's buying them?

I don't know.

The kid and his mom basement pop and his pimples eat many sandwiches.

I'm at one point in time, I imagine that there were market makers that had a hedge that, for reasons that were complicated, they were stuck with overnight positions like I almost understand that. But the day traders playing with these this is fan duels and draftking, pure speculative nonsense.

Yeah, exactly.

So that's why we don't have anything in that space, but it is something to look at from AFAR.

Really fascinating stuff. Last question before I jump to my favorite questions. So you're constantly thinking about how do we hedge this position, how do we create a buffer, how do we define a specific outcome for clients? What do you think the average investor isn't thinking about relative to

Yeah, I think, you know, while we've had a tremendous amount of growth in kind of the option space of downside protection and the income generation part, I think a lot of the market.

Is still.

I think thinking two dimensionally in the stocks and bonds, right, Like, instead of just diversifying across, think about you can still diversify, but think about other ways to shape your return, right or thinking about income generation out of the equity portfolio, think about income generation or boosting yield and your fixed income part of it, and then also thinking about risk

Right.

That's on one one standpoint I think people are still missing. The second I think is that I think one of the biggest drivers of the market today, no one would discree a is AI right. However, that's not the part that people are missing that you know, haven't been through the two thousands. I really feel like this is like nineteen ninety nine, two thousand. Like, think about the stocks that were big then, right.

Like you had Juniper Networks, Metromedia five right.

Like I remember you guys remember price Line Global Crossing.

Yeah, you know a lot of these companies have been either absorbed into other companies and still Priceline Expedia, there's a through line there. How is pets dot Com not chewy today? So some of them were just a little early exactly.

So let me ask you who won that trade?

Facebook, Google, Amazon, Amazon, Apple, Microsoft. A lot of those companies were private or startups then Google, Right, think about that, and I think that's the same, like history doesn't repeat itself at rhymes. I actually think a lot of the kind of the hugely successful companies from AI in startup mode. They're at y Comedy or the ninety of the uh almost eighty ninety percent of the companies at YC are

That's unbelievable. And I said to someone the other day, someone said, who's gonna dethrone and Video? And I said, the founder of that company hasn't graduated high school yet. But he's common or she's coming, he's not. It's not impossible. All right, Let's let's jump to our favorite questions that we ask all of our guests, starting with who are your mentors who helped shape your career?

Oh, that's a great question.

I would actually uh have to say my brother really yes, and in what way? I have an older brother, he's four years older than me. He's the overachiever. I'm the underachiever of the uh so, uh my brother I remember growing up he was like the uh he was good at math and science. I would literally show up the class and they'd be like, Oh, you're Bill Chain's brother.

You must be smart by the way. You know what that does to you.

It's like a lot of pressure, a lot of pressure. So he went on. He worked at Apple and then was at Tesla. I think he was chief architect of the dojo dojo price Folks that aren't familiar with dojo, it's the AI system at Tesla that coded the self driving right. He recently, and in fact, Bloomberg wrote an article about his firm, Density Ai that I think they are one of the first companies to really, uh kind of take on because the dojo I think system is one of the one of the more efficient ways that

I was like, yeah, he might just be four years old, right.

Or he can be deep into the process already. Yeah.

So, uh, they recently, like I said, like, Bloomberg just wrote an article about them on dense Ai and he he has been extremely Like a lot of times people ask like, hey, did you work that hard because your parents were, you know, like tire your parents. No. Actually I was just chasing my brother the whole time. It was definitely a different dynamic and uh, yeah, I couldn't be more proud of him.

Uh.

And a lot of times people are like, hey, what what tea are the chains drinking? Because we're but we get along great. While we're competitive, we we support each other.

But he's been.

You're in different fields, so the competition exactly.

He's engineering. I'm in financial yeah, yeah.

Exactly, so similar, similar background. Let's talk about books. What are some of your favorites. What are you reading right now? Oh?

I said Liar's Poker, a very inflacable one.

Yeah, just had its thirtieth anniversary. I think last year.

I like, I thought was really good for me was the book Influenced by Robert Childonie Fantastic.

It was a great book. Kind of along with that, how to win friends and influence people.

I think those are great. I actually in financed. One of my first ones was The Intelligent Investor by Ben Grant.

Yeah, Ben Graham. Those are kind of cornerstones.

Yeah, that's a great list. I know you are on planes a lot when you're not reading. What are you streaming? What's keeping you entertained on these long cross country flights, either podcasts or Netflix or whatever.

I do listen to podcasts a masters in business. However, there's a new thing that I've been doing. Actually it's not a book, all right, and it'll probably be hit everybody differently on on what I'm doing here. Okay, And I could tell you I got this from a good friend of mine and he's going to kill me for saying this, So.

I'm good.

A friend of mine and his name Matt Bellamy, he's the lead singer in the Muse and he actually taught me this, so I can't take credit for this. We go into chat EBT and he actually sent me the prompt, and we prompt chat GBT, tell me in the last two weeks, what you have learned that is beyond human comprehension something.

Along those lines.

How fascinating And by the way it spits out all this stuff because if you think about it humans, like we as a human you could get a PhD in biology you get a PhD. And astrophysicists you get PhD in chemistry, but like you're the expert in their field. But think about this that like chat GBT passed the Bar exam and like, I don't know, like a couple of weeks, right, So it's becoming experts and everything, and

Are you familiar with this?

Of course, like we wasn't familiar with spooky action at a distance. I mean they teach that in middle school.

Yeah, exactly.

So the quantum entanglement that you have two protons that you know, if you do want to X, why we'll do the same. It's just like having two dice. If dice on Earth. By the way, they've proven this, like if you roll the dice on Earth it rolls a six, it will definitely roll six, and it's not bound by space and time, so basically it could be light years away.

You roll that dice, it rolls an eight. This one on Earth is going to roll in eight.

And so then they sort of combine that with is that part of human consciousness that is your consciousness? Quantum entangled is what makes you you?

By the way, this type of thinking.

There's a related topic and I haven't run this through chat GBT, but I should, which is the concept of emergence intelligence emergence as the natural outcome of the universe. Why does the universe exist if not to create a conscience intelligence? Although the flip side of that is life is fairly common throughout the universe hydrogen, carbon, oxygen, nitrogen, but advanced technological life so far at least, appears to be exceedingly rare. So that's the counterbalance of emergence totally.

And then the other thing that I found recently that people can dig into I think this is fascinating, is that your head experiences time different than your feet from the proximity of Gravity's.

Well, certainly we have to adjust GPS because for the relative relative the GPS persons, which Einstein turned out to be right about exactly so. But the difference between your head and feet, oh yes, is so tiny unless you're falling into a black hole. And then spaghetification is the problem. Yeah.

So then you take quantum entanglement uh huh, And you then say, okay, if I have a proton here and a proton elsewhere, and the light in the how that proton experiences time through entanglement versus how time bends with gravity.

By the way, all of this just.

Keeps going deeper and deeper and deeper into And then the thing is that I keep telling it to explain it to me like I'm sixteen. Now my entire prompt explains everything. I will explain it to you as if you're sixteen years old.

So the issue I occasionally run in with perplexity or chat ept is it tends to conform its output to you. Yes, And sometimes I'll ask a question. It's like, no, I want a list of ten podcast questions. I just tell me about Jeff Chang and what led to VEST. Don't give me a podcast. I have my own questions.

That's why I use multiple rock every right. That way I get a whole plethora. And then what ends up happening is you get all this new stuff and then you dig deep into whatever topic. And I found that so fascinating because I just it's curiosity.

It's like if you're interested in these sorts of things exacsolutely, but you have to be on guard for the occasional hallucination. And every now and then I find myself leaving AI to go to just traditional search and say, hey, show me a source for this. Is this I don't think before AI. I don't think people were skeptical enough about the sources of what they consumed with AI. You really have to know what is real and what is fake.

Yeah, I think at recent college grad, I think similar to kind of bringing in full circle same thing, like develop the skills that you know you're not beholden to anybody, right whatever that is, whether you're in college or out of college, Like develop those skills that you can actually that they're portable one or the other, and then not be afraid of failure, take chances. Now, this is not for everybody, I would say, you know, meaning not everybody

Right, But that's the thing.

And then also keep your eye out for painful problems that you have the skill set to solve. So obtain those skill sets and then have your eyes out, eyes peeled throughout life, write them down, look for pain points, look for pain points, look for problems. And then the second the last thing is just a person thing is don't take yourself too seriously, right, have fun with life. And I think that that is because otherwise all this stuff can create massive amounts of burnout.

And our final question, what do you know about the world of buffered funds? Investing ETFs today might have been healthful fifteen twenty years ago when you were first getting started?

How hard it would have been? Right?

Like? Literally would that have discouraged you from launching?

Yeah? Well, I think that was actually the superpower, Right Like when you climb a mountain and you don't know how high it is, and if there's a cloud base, if you saw it and a clearer view, it probably wouldn't be If you told me to quit my job and I wouldn't get paid for four plus years, I probably wouldn't have done that, huh. But then it's like always success is always around the corner, at least you dream of it, right, everybody sees what you are now.

Big the mountain is, it would be nobody would.

Do it really really interesting. Thank you Jeff for being so generous with your time. We have been speaking with Jeff Chang, co founder and president of vest. If you enjoy this conversation, well check out any of the six hundred we've done over the past twelve years. You can I find those at iTunes and Spotify, YouTube, Bloomberg, wherever you get your favorite podcasts. I would be remiss if I didn't thank the product staff that helps with these