Lots More With Charlie McElligott on This Week's SaaSpocalypse

trend trades develop. That's usually accompanied or requirement or requirement being low volatility to accumulate those kind of smooth trends. So point being, I think there were a number of

market narratives that got a little lazy. You know, for instance, Q four of last year, as we recall, I think there was you know, somewhere three to four months ago, there was still a fair bit of concern with regards to this idea of like labor cracking, you know, and there was still a lot of feedback with regards to Liberation Day and the policy volatility dynamics. You know, before

things really got hot with policy volatility most recently. But and that was leading to some you know, some skepticism. And as it relates to kind of the equities world, what did you do? You just stuck in the stuff that kept working, And that was that same dynamic we spoke about a number of times last year, you know, that crowding into secular growth, megacap tech AI. They just keep growing earnings, profitability, all of those metrics, and they

took up this massive part of the market. That's part of this positioning that set. You know, at some point Q four run hot starts happening. You start seeing data upside surprising again. Right, he starts openly and more recently transitioning into January talking openly advocating his week dollar policy. Right, you know, so you start having these things where people were really accumulating around effectively a lot of short dollar trades. And when I'm sitting there and I'm seeing like, how

do these narratives go wrong? How does this crowding go wrong? And I'm seeing you know, gold and silver being attributed to this debasement narrative or this de dollarization narrative. There's credibility in those arguments, but I'm also a skeptic with regards to the flows and the actual like singular catalyst of those. But I start seeing those positionings really overshoot. We're not talking like linear projections like bending off the curve type of you know, price performance of late I

see em equities crowding. I see cyclical equities because everybody owned secular growth and nobody had enough economic sensitivity. So I start seeing these kind of positioning overshoots. You know,

that's all the work that we do internally. And it just said, if the dollar starts agitating and it stops going lower and you start losing these short term trend windows, and then you get maybe a little bit of wow, we didn't get the max dubbish hasset trade, right, Oh, we start seeing upside surprise data when everybody's short dollar and thinking rest of world growth and actually US is maybe leading to the upside again and reaccelerating dollars starts performing,

people start monetizing, and you start taking money out of these trades, and that turns into a bigger de risking.

so let's lean into this. And then so it's interesting to hear. You know, then you get this bigger reversal. Can we measure it when you talk about like how leverage and how consensus these trades were, whether we're talking about software or whatever, can we measure how crowded those trades were, how levered these trades were.

grosses were too big. Right if you look at a snapshot of a model risk parity portfolio, four assets long only using leverage to allocate your volatility right, long only, inequities, bonds, credit, commodities, different waitings based on different economic scenarios, like a very kind of generic versu parity. We're seeing on a let's say a five year look back ninety nine spot seven percentile gross exposure. It just so happens, right, you know.

Goldman Sachs Prime brokerage data with regards to equity hedge fund grosses as of last Friday one hundred percentile on a five year look back. So like these are these are synonymous. Now, Now, gross exposure is not purely a function of trailing realized volatility. Right, Different strategies deployed, different leverage, different strategies, you know, will try to amplify a market neutral versus a net lean or a directional lean. But by and large, the grosses were too damn big. It's

like the guy that used to run for air. And when you see grosses being that big, and you see prices bending off the curve, and you see the thesis behind it, and this is where I'm pumped to tie in. Like the bitcoin read right, if debasement was actually what people are saying it was, right, this idea that in dedollarization, you know, moving away from fiat you know, US policy volatility, US fiscal deficit, which, by the way, okay, like same

with Europe, same with Japan. Now you know with their little trust moment, you know, Europe is taking the austerity break off. That's a global phenomenon with fiat currency. So like, okay, I can get with that to a certain extent. But like why didn't bitcoin participate if that's what people kind of claim, as you know, bitcoin's a shape shifter, as

is gold. But you know, my story, in my skepticism with regards to that debasement or that dedollarization, was the way that bitcoin absolutely did not participate when it was gold and silver. And look, you know, I sit in an options business. I see just outrageous call skews and demand for upside and people, you know, keep putting on, keep reloading into these, you know, the call spreads and upside trades and SLV and GLD. The options volumes are massive.

It became a s aculative macro tourist retail type of a trade on top of all this, but Bitcoin kept going lower and I started seeing one, if people are grabbing, people clearly have this preference for real assets, you know, physical assets. Right now, in this world of debasement, of FIAT, of fiscal deficits, spend, perpetual issuance, all those things, Bitcoin is trading like software. It's trading like SaaS, which is going through an existential crisis right now for really justified reasons,

especially with regards to valuation. Right And the funny thing is, when we were talking about you know how AI was actually going to I was making the point kind of Q four start of Q four last year, there's two major tailwinds for equities that become potential headwinds in twenty twenty six. They're very well socialized, but they still ring true. Ironically,

we kind of got a backdoor on one. Was that the CAPEC spending with regard to AI, you know, was burning your cash when you're moving through the cash so fast, right, and the cash that made these companies so preferred, so you know, screening is quality and profitability and all these great things. They're liquid, they're big, you can move in and out of them. They only go higher, you know.

demand for equities over the past fifteen years. Wow, And it's a val suppressor yep, right, I mean you are a bigger if you're a passive bin under the market on a view up order, or more importantly, when there is a draw down, that's when they get most active. So it's like long gamut. It's like synthetical long gam in the market. So one you're burning through your cash and you're no longer doing that. Two you're burning through your

cash and you're no longer buying back stock. Is this vall shock absorber and passive bin into the market fromkin of sort of a quarter to a third of the overall S and p's buyback that you're then too having to take on this new debt, you take on new loans. You know, to a certain extent, you're trying to lever the bow sheet. But you know, more importantly, what does that mean for credit? Credit has been this perpetual kind of vauld bleed. Yeah, because spreads are so tight credit.

He's like, actually, when you start to see you know, the cash turn into capex spend, there's usually kind of a point of agitation. It's not always in the right direction. For equities, let's say, right, and in this case, I

think we're starting obviously we're starting to get that. But the credit point is critical because the pace of the capex kind of prisoner dilemma that we're still seeing right now with like yesterday's earnings releases, the magnitude of that supply in the investment grade market is simply going to widen spreads. Tech is a big part of that. Now, this is the punchline, bringing it back to software, bringing

it back to bitcoin. As we were all kind of watching this potential for you know, the credit markets to become a headwind, not in a shock, not in a freeze, you know, not in anything close to a systemic dynamic. Just too much supply with spreads too tight, you're not being compensated for it so like there was kind of this general shortened credit because guess what, the whole world is watching one in like baby footsteps. Can Oracle get their funding done? That was the one day we had

a sigh of relief. This week, by the way, they got twenty five billion of investment grade done plus converts with like one hundred and twenty nine billion of demand the market. Huge extail. But guess what, open Ai is still in the background somewhere. We're like kind of sort of in the next two months, they got to come up with like anywhere from one hundred to two hundred billion bucks. And that is still a major point of skepticism.

software is going through this ex centric crisis. And here's the deal. Those dudes are stuffed on restricted shares. There's stuffed on RSUs and the concentric circles of VC boys and tech boys in SaaS Bros and Bitcoin Bros. Has a lot of overlap of.

to date with SaaS software and it's quite remarkable. And that to me, as I step back to this large conversation, it's not really about debasement, right, this is a digital phenomenon. This is a liquidity crunch. With regards to this, the idiosyncratics of that sector really coming under attack. And by the way, now it's also become a backdoor credit story where it's not simply the spread widening from the hyperscalers.

It's people worrying now about private credit. Actually the BDC guys, which are you know, sitting on a lot of this stuff with you know, really tricky evaluations and not a lot of like buffer room and you know, with covenants and things like that. So you know, it's become a huge macro story. They kind of did the end around with regards to where we thought it was going to come.

But we can handle a couple things at once, you know, you know, all of a sudden you get a little bit of a surprise with regards to the Fed chair dollar stabilizes. You've already had people in all these short dollar trades. People start taking money out of you know, gold upside, silver upside, They start taking off some em upside. And at that point, like last Thursday, I'm looking at grosses. I'm looking at our CTA trend net exposures and commodities

and metals ninety eight percentile. I'm looking at our net short dollar exposure zero percentile. Look at our net equities exposure ninety seven percentile. I'm saying, these are the qualitative things I need to see where profit taking and monetization turns into a risk management.

it's not quite clear where they're going to go. So correlation seems to be picking up right like in a market crash, correlation goes to one. But at the same time, I can't figure out what's going on with implied correlation because if I look that up, it's still pretty low.

it's it's art plus science. The part of the problem with vall in general certainly being sticky, and I think it comes down to where the money has flowed with regards to the hedge fund space is that, you know, maybe ten fifteen years ago, the long short universe, you know, running net exposure was I don't want to say, you know, necessarily dollar for dollar like acts or necessarily larger than you know, the multi strats at the time, but like they ran net and they would lever up positions or

they would hedge their longs, and they were you know, generally speaking, there was buyers volatility with those guys to a certain extent. You know, if you look back kind of on the sort of let's say five a ten

years of dollar flows into the hedge fund space. With regards to all new flows, multistrats are conservatively eighty cents of every dollar in, and then if you actually include outflows from other strategies, you're legitimately through one dollar of So the point I'm making here and multi strats are unbelievable with regards to their low volatility, with regards to the consistency of their returns with regards to the the

disciplined risk management, the tight stops model, the non correlated returns, which is the whole story why people keep allocating into them. They've proven to be such an absolutely undeniable force, hence all this dollar flow. But think about it like this, we don't see the core ones anymore. And this is like core ones core ones meaning like when things shock, everything together or down together, right, And that was kind

of the old state of the world. But now what we tend to see and this is exactly what we saw earlier this week when you had you know, of course financial market returns are not on a normal distribution, but for you know.

Here is the fact that the dollars and the leverage controlled by the market neutral multi strat equity space are so overwhelming in the sense that when you get when you are forced to de risk or degross, you know, the tilts go wrong, that you have the offsetting short on the other end. Right, It's not just you stop out of your net longs or your crowded lungs, right, It's that you're also you know, theoretically an equal dollar

amount on the short side being covered. And what ends up happening on like the two big down days this week, it was like two hundred and fifty stocks were up, two hundred fifty stocks were down. Yeah, so you're getting this like reverse dispersion right, very much the opposite of what last year was, which is this crazy concentration of like top decile, bottom decile just spread ninety nine percentile like a ten year basis, which feeds into why people

are loaded into momentum. Right, the higher stuff keeps going higher. It's human nature. This is like fom in France. This

is factor alpha, you know, commoditized alpha. So these things I think due to this kind of where the dollar flows have been, the market neutrality, the fact that there's always this offset against it, you're not getting core shocks and when you don't get core shocks necessarily, at least initially, because VAUL did not really react until just like two days ago and yesterday iv all ive all got a

little tricky too. But you know, point being, you need correlation as an input to higher vault to like sustain, and you're just not getting that. You still have low core now. The trick is to your point, it's crazy.

It's very interesting. You mentioned the defensives, right, the reversal that we saw when people said, look, I'm too much exposure and secular growth metacap tac AI, which gives you a lot of momentum exposure, a lot of you know, you know, unintended kind of exposures that when people said

I need more economic sensitivity, I'm taking up my cyclicality. Right, The three best performing sectors kind of year to date for most of the year have been like energy, materials, industrials, right, right, stuff that people have kind of been underweted for the longest time in the absence of a hot economic cycle,

you know. But also too, when you started seeing defensives joining that rotation, like it was this massive value over growth trade and that's the three four or five z score types of moves that you're talking about where people didn't have that stuff on and your lungs go against you and your shorts go against you, and and that is also amplifying, you know, these kinds of moves because look, it's not just the market neutrals, like they're not Boogeyman here.

They're unbelievable. They barely lose money ever on a monthly basis. They just have very disciplined it stops to get out of these lians and tilts hard and fast, unemotionally. But guess what it's you know, retail, it's all the story stocks, all these themes. That's why I pointed out for the last two years of the boom and leverage gtfs like eighty two percent of the assets, and leverage gtfs which

act like synthetic negative gamma. Right, the higher you go, the more you have to buy at the end of the day, the lower you go, the more you have to sell. You know, massive pool of AUM now because of like retail, you know, tilted speculative leverage behavior are tied into that concentric circle of AI, megacap, tech, semis,

you know, disruptor or crypto. So we're super overweighted, super over index to that stuff, which amplifies when you have the tight market neutral stop outs, you know, with all that leverage, with all that AUM, you know, to get their factors right, because at the end of the day, those guys are not trying to make factor bets. There's scenarios where you maybe run even the little net if there's like a big you know, economic reacceleration trade or

something like that. But generally speaking, the ideas like we don't want beta to the S and P. That's the point. That's why people pass. Stop comparing us to S and P returns. So all these things are part of this like backdrop plus the narrative overshoots.

like a you know, a market neutral is probably two hundred three hundred percent gross buy and large like long short was always kind of like fifty net one fifty gross something to that extent. But they're just not as big of a player anymore. But you know that's the trick here, Like when I start seeing it, I always love the systematic stuff because it's so tied in. It kind of looks a lot like the options market and market structure. Buying large feeds momentum now, right, you're not

scaling out of positions. The more they trend, you're loading into them. So like whether it's target volatility or CTA, or you assign an exposure target, you know, a leverage target, and if the volatility is five and your vault target is ten, you got to lever that two times or twelve, you know, like, and that is ironically, the lower vault goes, the more you need to add leverage onto that position,

right to match your target. And that's why that's the problem we create crashes because all of modern anybody who's like on a var model is actually a momentum trader. Right, you have to deleverage when VAUL goes higher, by and large. Now, of course, if you have a high conviction bet and VALL goes higher, that's actually going to be part of your potential return profile. You know, it's great, and God knows, people have learned to like you know, sell rich vall

and by you know, by dips it's become conditioned. These time horizons are like hours at this point, but like.

That's the opportunity. You are not going to retire four percent in cash, you know, that's just the way this world works right now, now, you know, do you necessarily need to be like shorting vall or things like that. That's not the way to do this. But people, yolo,

it's the financial nihilism that we've spoken about. You know many many times you seek out the movement, you want the stuff that's moving and generally speaking, and this is where it's so interesting, like you try to press moves by and large, certainly like the retail cohort, the world is not built the vast majority of the time for mean reversion anymore. Value is mean reversion, like something is rich,

something is cheap. It's this counter kind of like a gamma type of flow, you know, long gamma type flow. We feed moves now because of the risk management dynamics and especially too, just like market structure, how much trend there is built into the market leverage, DTFS, options, things like that, you know, particularly the way that people tend to use them, which is tend of to feed into

prevailing moves. So all of this kind of changes the behavior and the expected outcomes where you know, momentum has been you know, this remarkable factor for you know, academic history studying these things because of like greed and fear and things like that, and moves can extend longer than you think. Just because a trade is crowded doesn't mean

it's the wrong trade. But when you start to layer in, as they said, the positioning data, the overall leverage data, the kind of the conversational quality ative, how many people are buying into this? But then you see you know, some like divots here and there and like the stories that doesn't actually make sense. And actually this thing is starting to stall. And now I got people taking money out of this thing, and I got trend this loaded into it. This is going to unwind hard. And I

sent that note Thursday, you know, started unwinding hard. Friday doors got blown off and guess what it waterfalls. So other crowded trades go cospy. Everybody's like, you know, no brainer into that Japanese bank longs, right, which are a short JGB proxy macro tourism. Like, people start coming out of these trades because they're non core, but they were.

reversals happen. You take off your hedges, or you take off your directional stuff, whether you're shorting futures against the moves or you're buying downside puts, you're buying vixed calls. You start to unwind that and guess what, Like now the dealer's got to take off their stuff, and you got delta a by and then some people say, oh, everybody's taking their hedges off around the street, and market's

starting to rally off these lows. I'm going to buy some zero DT calls and you know, then you create more delta to buy back to the races, and VALL starts. You know, if VALL starts rolling over, and guess what, then the systematic the VALL supply people come out of the woodwork and they feel comfortable to come back and lean into this and that's the facto by the dip. Right, So this is the cycle in the world do we

live and there's too many asks. This is a final point that may be tangential here, But with regards to how these dynamics end, it's not necessarily about like back in the day, it's like Warren Buffett steps in, you know, provides some you know, financing line or you know Toma Bravo stepping in doing some like deal is calling up Warren. Yeah, I don't know if it's more about you know, these

flows kind of stopping the bleeding. But you know, this is the other thing too, like the vall flows are so important with regards to the like the hedge on lines and creating the turn in the market, the inflection, especially with the conditioning by the dip cell. The ball rip that like fixed income has been trash for five years since the tightening cycle since you know, poor inflation is still running too hot. Right, so people said, look,

this thing doesn't work for me. It's not helping my portfolio with my sixty forty is awful, right, but I can't just be long equities, but I need some yield. I'm I'm boomer, I'm old. I need some you know, some enhancement. But I want equities upside. And we've talked about this so many times, and it's true, you know, because the assets keep growing, all the yield enhancement vehicles,

all these income vehicles, they're selling equity optionality. So your long underlying equities, you cap that upside to a certain extent, but you're generating yield by selling options. That's the new fixed income. And those flows matter because those flows that when the kind of the coast is clear, they just come in and it's just vegas supply and it just smashes it all back down.