Welcome on Trillions. I'm Joel Webber and I'm Eric bel Tunis. Eric new launch just happened very much, caught your attention and you immediately we're like, we gotta get these guys on Trillions to talk to him. What's the product. Yeah, there's two launches a year, that's over one a day, and I don't know, maybe five or six just catch my attention big time over the course of the year.
This is one of them. Because just when you think there's no white space left and etf, somebody comes around with something that's pretty original and this is really interesting idea.
It's called night Shares, that's the name of the brand, and it really tries to put into reality something that we've been reading about over the past several years where you see this article or study that that points out that, hey, if you only hold the U S Stock market at night, in other words, you buy at the clothes and you sell it the open, so you hold it overnight and you don't hold it during the day. You crush holding
it during the day. There's something about that. It's like a phenomenon, but it's really never been tried in reality because there are real world issues that have probably stopped some people from trying it, Um. But here we have an et f issuer or that's come out and said we're going to try to do this, and they have two launches that have our live which is the large caps and then a small cap version. So they're trying
to capture what they call the night effect. Um. And you know, we'll there, we'll go into, you know, some of the hurdles and challenges, but it's gonna be a fascinating experiment. Joining us on trillions is gonna be Max Cookman, he's this chief investment officer, and Bruce Levine he's the CEO this time on trillions, the night Effect Bruce, Max, welcome to Trillion, Thanks so much for having us, nice to be here. Can you explain the big idea here,
Bruce absolutely, Um. You know Eric touched on it. The big idea is that there are some unusual differences between what happens in the markets overnight and during the daytime session, and the overnight session historically has shown far better returns
and it's far better behaved from volatility standpoint. So we find the night session to be a really interesting, uh place to play, and we brought ETF to market that would for the first time separate these very unique and differentiated return streams between the day and night and and max. How do you actually set this up to work? Right? Because it's as Eric mentioned in the in the beginning there, it seems like, you know, very obvious idea, but like,
how do you actually bring this into practice? Yeah, and this is actually one of the things that made me think a bit of the myth of Prometheus, where we're taking something that exists that was uncapturable for for a common investor in bringing it down to them. Um, it actually is is a little bit more complex, and it requires uh some knowledge of derivatives, that requires understanding how
the futures market works, how total return swaps work. Because we really want to create an efficient exposure tonight effect where we really make it um something that considers the impact, that considers tea costs and um. The way we're implementing it right now is we're buying futures at the close and selling them at the open, and as we scale, we're able to really expand on that construction to continue making it highly efficient. Okay, UM, I want to circle
back on you call tea cost transaction costs. That's been a big worry or I guess something people who pointed out when a table I just for one second, I want to get back to the night effect, Bruce. And also, can you explain why why would the stock market do better at night than during the day. What factors are contributing to that? And that's a really great question, and it was so interesting to look at it. And the
first time you see this data, it's just stunning. Uh. You know, there's been research done for a long time. There's sort of three buckets of reasons. I call it. One is just that there's news flow when the markets are closed. So this could be earnings announcements, which although not universally positive on balanced stocks trade up and then M and A, which is generally extremely positive for the market. So those all happen when the markets are closed, so
you have to be invested to catch them. The second thing is just structural de risking that seems to happen among institutions. And an example this would be an et F market making firm. Their business is to play between the bid and the ask all day long, but their business is not to hold inventory overnight, so at the end of the day, they kind of flatten out their positions and then they kind of read buying the next morning.
And then the last one is also kind of there's a bunch of complexities that you can avoid if you just get out by the end of the day. So, um, we found this pattern, uh of the night effect happens worldwide, which is interesting. So there must be something going on, you know, And it's I've seen people pitch their whole investment strategy to investors, and what they pitch is we
get out so you can sleep at night. And and it also almost leaves something on the table for those that are you know, not so m scared by the overnight session. Yeah, we we think that your money should work while you sleep, not and not make you, you you know, work harder during the day. Well, I mean, I guess people who invest in bitcoin may differ from that because on the weekend you can see them having to suffer when all the stock people are like, I'm not I
have nothing to worry about on the weekend. But anyway, but it's true, the market doesn't ever truly sleep. It's just you only see the prices in action during those whatever eight hours during the day. But it's still like like a lot of times, they'll be news out of UM over the weekend or before the market, and I'll do G I, P O and Bloomberg which is UM intra day pricing, and I'll tweet out, you know, pre market trading the S and P s up two on
this news or whatever. Now, I will say sometimes it's bad like such and such a down on this news. And I guess, Bruce, I'll come back to you on that question, which is that you know, take something like earnings. Okay, fine, in a good market, earnings will be good and announced after the clothes. But wouldn't that wouldn't there be the reverse in like this kind of market where it's harder to get let's say we hit a recession or whatever. Um,
you know, wouldn't that just be negative for the night effect? Yeah? You know, it's interesting when you look at the numbers yere to day in a in a really tough market where there's been a lot of news. Um. The you know, if you were buying a hold here today, you're down far more than if you were just owning the night session.
So you can see you can sort of feel this viscerally if you've been in the markets here to date where you've had all these days where uh, the markets open kind of either slightly up, kind of flattershed slightly down and then just start picking up steam to the cell side. And so um, we have not seen nearly as much you know, damage coming in the night session
this year, so um. And and that's consistent with our research which was you see far more left tail events happening during the day, you know, statistically than you do happening a night. Okay, So I'm really curious. You guys have had to have done a ton of back testing on this. Um, how is it held up like both both recently while you know, markets have been incredibly turbulent so far this year, but also more historically, it's it's
held up really well. I mean, I'll give you an example of small caps so UM year to date, if you just held say, you know, a small cap up index, you'd be down about two If you just held the night portion, you'd be down less than six percent. So it's pretty substantial. And as we look at it historically, UM, it's important to note that this effect does not always work right And and by the way, I think if anyone comes on the podcast and says, hey, we found something.
It's always gonna work. It's always going to generate you alpha. I would hope there's a lot of skepticism in the room. Um, but we do find that if we do like a rolling one three five year analysis of sharp ratios or um or returns, the night effect consistently does outperform the day's session. And it's across a lot of different betas. Um let me let me just let me just jump in there real quick. Um, So you talk about this.
I remember looking at the Bespoke study, which was the one I think that the papers covered, the media covered like a year ago. Bloomberg had an article on it. Anyway, it shows that the night returns something like six and the day was like flat or down. Even so, a very cool chart. One line goes up big, one line is flat. However, if you just held the S and P five and didn't do just held at the whole time,
you were up. So I guess what would you say to somebody who's like, well, what I'm not going to just hold during the day, I'm gonna hold day and night.
Isn't that just easier? I would say, it's it's it's a story of risk and return, right, and I think especially in this environment where investors are looking for ways to well create a more divorce PI portfolio, create a more stable portfolio, it's really important to consider the denominator of what should be really any acid allocation equation, which is your standard deviation. And it's true about with large caps.
You do see a positive day effect. And yes, you will earn more money if you hold twenty four hours over most periods, but you will do so at the expense of a disproportionately higher risk. Yeah. So I would just add to that that potentially, Eric, you can expand your equity exposure if you're playing in the lower risk portion of them. You know of the equity market, and that's what the night session is. So that's one thing.
And then the other thing I'll add is um that chart you referenced was a was a large cap, but what we found in small caps was really surprising, which was that the day portion of the Russell too over time was negative. So they're holding the night only actually outperformed not only on the risk side, but on the performance side. So I'm curious anything that ever seems this good to be true feels like, just like, why hasn't somebody else figured this out or figured out a way
it are this? And specifically I'm just thinking of hedge funds who have you know, teams of analysts specifically trying to find things like this that are just sitting in in plain side, even if that plain side as the lights off. But why, you know, why hasn't this been exploited yet and what risks does that maybe create? Yeah, so we know there's some hedge funds doing this trade
and you know there are people playing at it. UM asked for why it's never been packaged as an E t F M. I don't know, other than you know, I've spent like twenty years doing E t F product launches that I've never seen the research. In the minute I saw it, I said, wow, this is really interesting. Um, in terms of the risks. Uh, really, I think mind, your question is if it works as it get arped away, And that's a really fascinating question and I hope we
find out, UM. But the question is at what level right, and even how structural it is and how the research has been out there for a while and the phenomenon persists are sensitive takes it would take quite a lot of capital to r to trage it away if if that's even going to occur. I mean, for me, there
there's no question that hedge funds are doing it. We we have a sister company that that is a hedge fund, which is actually where of this effect was discovered UM and this is one of our strongest um effects that we do capture there. And we just see that a lot of structural things, whether it's earnings, economics, announcement, et cetera,
they do occur when cash markets are closed. You see, investor makeup is very different between who trades in equities when US markets are closed in terms of European institutions and Asian institutions, and so those are the things that are really key versus if I say, hey, I found this really cool skew and options and I'm going to trade on it. Well, yeah, once you start doing that in size, everyone else starts reverse engineering it and you see about alpha fade UM. We think the structural reasons
is why this effect can be significantly more persistent. So right now you've you've got US focused products. But at the beginning you mentioned that you've noticed this night effect actually has global potential, right, so I'm wondering, you know, what, what kind of global ideas are you kind of eyeing here,
and what what challenges withoud that product potentially create. So we have a pretty long product development queue because it when you start to really dig into this night effect, there's lots of different ways to work with it, and so we would expect at some point to have products that offer us investors, um perhaps the chance to be in different segments of the market at different times over the twenty four hour cycle, so that we're sort of
capturing the right effect differently as time persists. Uh, so you know, stay tuned for that. Um, Okay, we gotta here's the big challenge. So I've seen people right about this the replies on Twitter, and this is part of what the factor world sometimes bumps up against, especially momentum, is the fact that you have to trade a lot to keep up with this. So I'm just gonna do
quick math correct if I'm wrong. Let's say I know you're using futures, but let's say you held spy during the night only to one basis point a bit as spread. So if you add up two hundred days of doing that, what is that three four hundred basis points of trading costs. That's four So that's like a hurdle to get over.
And because it's ongoing, it's like a constant corrosion to the returns and that has been I think one of the biggest um pushbacks on this strategy is that it can't be done in the wild because transaction costs would eat you alive. So what's your plan for that? Yeah, that's absolutely um probably the and the strategy hasn't been
tried before. So look, our goal is to give you the greatest institutional execution quality we can and to do it, you know, across we're looking across a number of different vehicles to do it. We're starting out with futures and you know what we see internally is that we think we can trade you know, somewhere between a half a basis point and a basis point per day. Okay, so if you analyze that over two days, you know that's
basis points. And then we have cash collateral that backs up the futures contracts that's going to sit in treasuries and cash, and now that rates have popped up a little bit, you know, we may be able to get a large percentage of that offset from the cash collatoral. Now let's explain this again, uh like the local third grade style UM, because when you use futures, right, you you you buy a little bit, but you get a lot.
So just explain the sort of dynamics of how you can hold treasuries because when someone pulls this up, I guess eventually they're going to see a bunch of treasuries in here, right, They're not going to see the S and P five hunter or anything like that. So just explain how the future's exposure to treasuries works. And that's a good question. So you know, futures are contracts, right, so so it may just show up as we have
notional exposure. But but features don't have value themselves until you you know, mark them from where you bought them to where you sold them. So the holdings of the fund will show up as treasuries, which we're gonna hold seven. And it's the fact that we can you know, features really provide some leverage in the sense of um, we can uh sitting as treasuries, and they back the futures contracts and allow us to hold larger amounts of futures.
So it's because of that that we're able to get you know, sort of this cash collateral return source in addition to staying invested in the equity market. And and right now, the treasuries, I'm assuming you'll hold short term debt right like two year or something like that. Yeah, well we'll we'll we'll hold um fairly low duration treasuries.
We you know, will be smart about that. And certainly, UM, you know, having run a pretty large derivative book, very comfortable with saying that there's a right and a wrong way due to collateral management, UM, and specially something like this, we want to be safe. The goal is to offset the tea costs and UM, I think at the current you know, UM rate environment, we can do that with
very low duration. Did you file these after the FED changed its mission from like keeping rates low to like fighting inflation, because clearly that was a a good It's arguably good timing in that you were looking for something to offset this transaction cost. But did that play into your filing filed in March? So I'm not exactly sure
when they changed. And and look, we were focused on bringing this to market and and we were looking at lots of different ways to run the fund, and I think the fact that rates have popped up and has maybe made us lean towards this particular way of running the fund. Okay, well, I'm curious, Bruce, you have a really interesting backstory. You've you've been in the e t F world for a really long time. Um at I shares, you help launch l qt h y G. These are
incredibly um successful bond ETFs. I'm just wondering, you know, like all of this, like what have you what have you learned from your experience in the industry that you're going to be applying here. It has been an interesting, right, you know, because I've seen different kinds of products, right, some of them. In the early days of I shares, it was just an educational thing. We were new with this new fangled thing called an e t F and once you've got people over the hump of understanding it,
they really put in. With wisdom Tree, we were new
with a different way to index, you know. Prior to wisdom Tree and ETF, theres just beta and now they're smart data, right, And wisdom Tree was a pioneer and saying hey, there's a better way to create an index and and it was an educational challenge, but now well accepted that there's more than one way to index, and we see what we're doing with night Shares is similar to that in the sense of there is this sort of thin slice of the market that is aware of
this research and a very large slice of the market that's not so. First it's just educated and make aware that it's out there. Uh. And then you know, people will watch it and some will toe dip and some will you know, wait for proof. And but we think over time, you know, we've added a really interesting um dynamic to the market. Uh. And I appreciate what Eric said right at the beginning. It's just not that many things that you know are truly differentiate in the market space.
I want to pitch Max on a product idea I have. I think you guys would be the right ones to launch it. We had a Shark Tank type episode about two years ago where a bunch of reporters and analysts pitched e T F ideas to a judge and mine, I believe mine one, or it came in second or something, but it was called X bond. It was just forgets because it's just in his mind it was the greatest pitch of all time, but yeah, you gotta see it a little bit more Jamaican x mon Um, I wont,
at least in my mind. Um. And basically this is the S and P five hundred x Mondays because you know how like everybody freaks out over the weekend if there's bad news Friday, and like you've black Monday seven, then there was a black Monday too. Just seems like Mondays are brutal days and they've done studies that Monday does on average return a little less than the rest of the week. What do you think of that idea?
And have you ever thought about actually explaining this out of just the night but into other times, like just making time your thing? Well, well, I definitely think that in the t F game, having a good ticker is important, so so Eric, if nothing else, you've definitely nailed that.
And that was a polite letdown. I think, Max, no, no no, no, no, I mean, I I do think there's you know, if you look at time overall, um and seasonality and you know all of that, there there's more ground to cover there. I think for us, um we're pretty focused on on the night. We think there's a whole lot to do in the nighttime before we start looking at other things. But you know, certainly, um, the x mon is a
concept that that has some some grounding in reality. If you do look at the Monday fact, you know, Monday scaries are real. Yeah, no one likes Mondays. It's like it also hits the heart. Now I hate Mondays. This lines up with my values. Eric. The other key thing is every ETF needs to have a good spokesman, So you've got to get Garfield to be your spokesman. Or that moment from office Space, somebody's been a case of the Monday's. Yeah, yeah, I don't know. I think there's
something there. We'll see. Maybe if you guys have success, you can branch out into other parts of the calendar. You could also do a sell in may E t F and just have one that just just doesn't hold the stocks during the summer, although that's that's been proven to be pretty much a lie. But anyway, there's definitely some some some options here. I think in fact that the name of the company that I thought of was Calendar Shares. You guys are like you're the closest thing
to that sort of tongue in cheek idea. UM. So again, that's part of the reason I was so interesting to talk to you guys, because time hasn't really been sliced up the way sectors have and countries and geographic regions, etcetera. Alright, enough for America. Uh. Speaking of speaking of tickers, uh in spy in i w M. Both of these are great. You got the inn at the front. Um. We always end with a ticker question. Um, Max, what is your favorite E t F ticker that is not your own?
And Bruce will come to you next man. Um, I have to say, SARK is my favorite ticker that's not our own. That's good. That's the first one we've had. That's the first. Bruce, Well, I'm a little partial because I've been working with John Davy over story for a long time and we love pp I uh the first inflation Global inflation protected ETFUM, you know that that's a great ticker. That is a good one. All right, Max Rus, thanks so much for joining us on Trillians. Thanks thanks
for having us, Thanks for listening to trillions. Until next time, you can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast Spotify, and wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Weber Show. He's at Eric Baltunas. This episode of Trilliance was produced by Magnus Hendrickson. Francesca Levie is the head of Bloomberg Podcast. Bye.