YouSaid · the spoken record

Ari Paul

lines on the record
70
first
2021-03-18
most recent
2021-03-18
sittings or episodes
1
sources
podcast

Every line below is reproduced as it was said and linked to the record it came from. Nothing here is summarised or generated. Directory · Search · Corrections

  1. “It's incredibly high, and that was part of my thesis looking at the space. It wasn't just the positive EV of the beta of Bitcoin. It was also as a trader in a prior life. Trading's hard now. Machine learning algorithmic trading has eaten up a lot of the alpha that used to be discretionary. It's extremely competitive. Trading is just very, very competitive. Things that used to be incredibly easy to do now are eking out single-digit returns where there used to be triple digit. So it's hard because it's competitive. It's hard because algos are in it. Lots of capital is in it. It's hard because there aren't barriers to entry. So in crypto, it's only barriers to entry. Everything is hard about crypto. You have the regulatory uncertainty around certain things. You have lack of trading software, lack of operational tools. You don't have accounting software. You don't have back office equipment. You don't have a Bloomberg terminal. All the things that you take for granted in the traditional world, custody, reporting, tax filing, like everything, none of that existed in 2017 in the cryptocurrency.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  2. “So I was surveying the landscape on behalf of UC Chicago. I literally talked to every crypto fund I could find on UChicago's behalf. And there were like four that were investable at all. And by investible, I mean in a legal sense that actually had a hedge fund structure. And then talking to them, it was generally one or two people in an apartment. These were very early stage funds, generally run by engineers or young kids without really any pedigree. And I say that not to knock these people. You can have brilliant investors in cryptocurrency without a pedigree, but I knew that I wasn't going to be able to get you Chicago to invest. This was not the team I could pitch to the Chicago board for their first ever crypto investment. So it was really clear there was this Blue Ocean opportunity to launch a institutional professional crypto investment firm that would give investors peace of mind, that would give them a package they were familiar with, where I could talk alpha and beta and risk management and institutional custody and all of those things.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  3. “I felt this incredible sense of urgency that I had more conviction than I'd ever had in any trade, that we were in the midst of a parabolic run. It just felt like it's happening. This is crossing the chasm. This is going from niche toy to mainstream. I was very confident that we were going to be getting in 2017 something like 10x price appreciation. And so I felt this immense sense of urgency to capture that in some way. To me, it was like a clear opportunity of a lifetime. I'd spent hundreds of hours researching it. I felt like I had a deeper understanding of it than certainly most people in the world and most financial professionals. It's not that often in life that you see an opportunity that large. And so I thought I have to seize this. I explored a little bit. Could I do that within the endowment world? Pretty clear that the answer to that was no, even if I could convince you Chicago to make a small allocation, it would have been a small allocation. And it would have been spending a year getting them to put maybe $50 million to test the waters. That wouldn't have moved the needle to the grade I wanted.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  4. “Billion dollar market cap and its correlation generally it's run somewhere between 10 and 40 percent to equities and US equities or global equities are the biggest risk factor in any endowment portfolio that correlation spikes when equities collapse as it does for all risk assets and that in my view as a risk manager that's when correlation matters you care about it when everything's collapsing so it is a risk asset it is positively correlated to other risk assets but less so it's certainly less than one correlated to the sp500 and that means it's diversifying so big picture it's risky it's a risk asset but it's high EV I believe it's still high EV and it's relatively low correlation equities make it an incredible portfolio diversifier.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  5. “So, Bitcoin, not that much has changed in five years. It is a mature asset. It is a little bit less volatile. It is still a young, hyper-volatile, hyper-risky asset. My view from the beginning is the realized volatility is very high, the forward-looking volatility is very high. There's also existential risk. This is maybe debatable today, but I think it certainly could go to zero, as most assets in the world can. So how does that fit into a portfolio? This isn't really new or complex. When we think about portfolio construction, there's two variables that matter. The correlation of the rest of your portfolio and expected return. If you think that Bitcoin has a higher expected return than any other large asset or asset class in your portfolio, and its correlation is less than one, that means it should be a big position. How big you then need to get into the numbers. So Bitcoin in 2017, my view is it was the highest EV asset I could find in the world, certainly of one with a multi-annual”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  6. “I'm a geek about risk. I'm not really a quant, but I've played that role to some degree at Chicago. My title at UCACO was portfolio manager and risk specialist. And my view on risk has always been that risk is inseparable from return, that the idea of segregating the risk function from portfolio management is nonsensical. This is actually a discussion that I sometimes have with prospective investors in Blocktower where they'll say, oh, do you have a separate risk manager? And my view is that You can have a junior risk manager, which basically just means a quant. It's a quantitative analyst who runs data for you and presents them to the portfolio manager. That's great. But the idea of having a separate person be the risk manager who isn't the most senior investment professional makes no sense to me because that's the single most important thing. So my view is that risk management and portfolio management are truly inseparable, that you want the most senior, most talented investment professional to be running risk in basically any book.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  7. “Alongside of your interest in trying to educate the people of Chicago, Bitcoin, I know you spend a lot of time on the risk side. And I'm curious before we kind of dive into the crypto ecosystem, what did you learn about risk in a pool of capital like that?”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  8. “They didn't have to pitch it to their board. It's just another fintech fund. So that was an easy, whereas a direct allocation of Bitcoin, that requires a board discussion, board approval. It was frankly a little painful to watch because I saw the opportunity I was personally getting enriched from it and I wanted the institution to benefit. But you kind of saw how the bureaucracy gets in the way.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  9. “But we knew we couldn't get our institutions in, which is such a weird gap. Like, I'm an investment professional. I see something I personally want to have more than a third of my net worth in, and yet it might not be appropriate for the endowment. How does that work? And the answer for all of us we knew it wasn't about riskiness or appropriateness or anything like that. It was pure bureaucracy. We understood the psychology that a CIO has to answer to a board. And it's kind of investment by veto to some degree at the highest level, which is to say the way endowments typically work is you have an investment team that has a huge amount of discretion about what they invest in. But at the absolute highest level, allocation decisions have to be okay by the board. And so one key thing of how this plays out is the first crypto investments by the endowment world were in VC startups investing in the crypto space because that didn't require board approval. It was just another VC fund. A16Z, every endowment was in their earlier funds when A16 launched a crypto fund.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  10. “Let me build an educational base. Maybe it's still a year away from investing, but if I can make that a year instead of 18 months, if I can have you Chicago be one of the earliest institutions in, they're probably going to get in at a price 90% lower than their competitors. So I started doing that. I held educational seminars. I wasn't pushy. I actually didn't even say the endowment should be in. I said, hey, this is cool tech. It's a new asset. Anyone at the endowment who wants to hear an educational pitch come join? Almost everyone at the endowment will come to those meetings.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  11. “At first, I had personally invested in Bitcoin in 2014. Small size, I wasn't super convicted. It was almost a little bit of a plaything to me that it was intellectually interesting. I was trading it a little bit for fun. But at the time it was a couple billion dollar market cap when I first invested. I didn't think of it as an asset class. By 2016, it was clear to me that this is an asset class. It is growing. There is something very real and substantive here. Basically, I gained conviction over time. And I started thinking about it for the endowment. Before 2016, it almost didn't occur to me that this personal trait could be something an $8 billion endowment could allocate to. By 2016, Bitcoin was at $1.6 billion asset class, at least maybe it could be investable, and it was starting to get more institutional. You started having regulated fiat on ramps and regulated broker dealers and things like that. So I wasn't naive. I knew that there's no way any endowment is going to invest quickly. And my hope was maybe I can socialize this over time.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  12. “So, in your time sitting at the University of Chicago endowment, I know you started thinking about and researching Bitcoin and would love to hear your perspective at the time of what it was like looking at this new asset in an institution like that.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  13. “Like to brag that they have the longest time preference of anyone, that should yield higher returns. They get to be greedy when others are fearful. The reality was in the financial crisis endowments and pensions were net sellers, not net buyers. They thought they would be net buyers, but they were net sellers because suddenly they realized we have an institution that requires annual cash flows from us. The average endowment pays out something like four or five percent to its institution. And if your endowment size falls by half, suddenly that 4 or 5 percent is now 10%. If you're projecting forward returns, the general portfolio of sub 10%, that means you're going to destroy the endowment. So it was a gross realization that we may think of ourselves as perpetual life investors, but they're a real world circumstances. And then the bureaucratic side, which is it's all well and good to say that the endowment has a permanent time preference, but does the CIO, does the board, does the present university do the alumni? Are the alumni okay taking a 60% drawdown? Or are they going to go?”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  14. “However confident I am in the fair price of crude, it may be that the person betting against me is literally about to blow up a pipeline. They have better information than I do. That's markets. So when the financial crisis hit, it was a realization that, okay, there might be a lot of people in this industry who are far smarter than me, far more knowledgeable, far more experienced, but I see them making incredibly obvious mistakes. The way Wall Street priced real estate risk, for example, the way just a lot of mistakes that are not intellectual mistakes, and I spent a lot of time thinking about, man, why are all these really smart people with tons of skin in the game making such obvious errors? And my conclusion was it's structural. It's not that these people don't see it. It's that incentives are everything. Structure is everything. And the bureaucracy ends up dictating so much of market activity. So I learned the same. When I then went to the Chicago Endowment and saw the same thing from another angle, which is endowments in the financial crisis, all endowments think of themselves as perpetual life investors.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  15. “I was there for four years, so it was a decent amount of time there. Trading was a very natural fit, a very natural extension of poker. I will say fairly early on, I realized that I didn't permanently want to be a trader. When the financial crisis hit, I was enthralled and fascinated by it. It was a moment of realization that Susquehanna really drilled in us this idea that we're smart young kids who don't know much about the assets we're trading and humility is the most important thing. And it's funny talking about traders and humility because traders, by nature, you almost have to be a little bit arrogant to be a 24-year-old swinging tens of millions of dollars. There's kind of a natural arrogance there. But Susquehanna, the whole thing as a market maker is there's always someone who knows more than you. Always. And your goal as a market maker is basically no one to get out of the way. If someone is willing to bet a billion dollars that you're wrong, it doesn't matter how good your model is, they might know something. And my favorite example of this, I traded crude oil futures at one point, and there were terrorists in Nigeria who would occasionally bid up crude oil and then blow up a pipeline.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  16. “Winning every session, but he was winning more than me every session. And there was kind of nothing I could do about it. And so it was interesting to see, and I was able to make back that basically he won the tournament, but I bet on him to win. So a good lesson there that I often apply thinking about trading, which is in poker, there's game theory optimal play, and there's exploitative play. And the biggest winners are the ones who exploit.”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  17. “Was the recycles. So there was actually a bulletin board where every person in the market maker program could bet on who they thought would win first, second, and third. And they encouraged it. You can imagine a lot of firms kind of discouraging side bets. They actually encouraged us to bet, I think they discouraged giant sums of money. They didn't want people using a salary on it, but they were happy to see people betting a couple thousand dollars. And I think I learned as much from the side bets as I did from the poker. Actually, a quick anecdote on the poker game that I thought was a great life lesson for me. The guy who won it, I knew he was going to win after playing three hours with him, even though he was not the first or second best player in the game. So he was a player who in heads up games, I would consistently beat. But he really excelled at exploitative play. So if I was against a really bad player, I might win three big bets an hour. And I might win one big bet an hour off him, but he would win eight big bets an hour from the bad player. So I was...”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  18. “Susquehanna was known for its assistant trader training program, and they were so known for it that they would actually have you sign a contract when you joined that said it was a three-year non-compete when they put you through their training program. First, as an assistant trader, you're in this kind of after work class. And then you get invited to join a market maker program, which is a solid two to three months where you're not working. They're paying you, but you're just in class all day. And the idea is you graduate from that and you're an options market maker. And as a 23 or 24 year old, you're given an immense amount of responsibility. You're running a book basically 15 months out of college and potentially a very large book. So it was a really top-notch training program of market making and it's part of that you would play something like 100 hours of poker and literally it was just you'd have 10 people to a table we'd be playing hour after hour bill chen who was a world series of poker champion was also a quant it susquehanna he kind of ran that program and something they encouraged that i found fascinating”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  19. “College undergrad, I was a bit aimless. I thought I was going to do biology or neuroscience first. I ended up as a poly sci major. And really the thing that grabbed me in college was poker. I played”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source

  20. “My guest on today's show is Ari Paul, the co-founder and chief investment officer of Block Tower Capital, a crypto and blockchain investment firm he started alongside Matthew Getz in twenty seventeen with backing from Andreessen Horowitz and Union Square Ventures. Ari started his career as a trader at Susquehanna International Group and later found his way to the University of Chicago Endowment as a portfolio manager, overseeing an internal hedge fund portfolio and assessing risk for the university's $8 billion endowment. Our conversation covers Ari's early lessons in trading, discovery of crypto at Chicago, obstacles for institutional participation, and launch of Block Tower as a result. We discuss active management in the crypto markets, research and trading, portfolio construction, opportunities in NFTs and gaming,”

    2021-03-18 · Capital Allocators · Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading (Capital Allocators, EP.183) · IDENTIFIED FROM THE TRANSCRIPT · source