YouSaid · the spoken record

Mike Green

lines on the record: 79
first: 2024-08-15
most recent: 2024-08-15
sittings or episodes: 1
sources: podcast

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“I can look at the market and say, you know what? Thank you for the cash. I'm going to hold it in my portfolio. I'm going to use this as an opportunity for me to reduce my exposure to the market, or I could choose to use it to buy something without having to sell something.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's really what distinguishes the difference. That's what David is highlighting as more and more investors transition to this systematic algorithmic investment that simply says, did you give me cash? If so, then buy. Did you ask for cash? If so, then sell. That starts to change the market behavior in a measurable and meaningful fashion. It actually causes two things to happen. One is it creates a momentum bid. Because what do I choose to buy? I choose to buy whatever the market is pricing it at. So things that went up since my last purchase, I buy more of as a proportion of my assets. I buy less of things that went down. The second thing that it ultimately does is it creates conditions under which there's a transition from cash rich portfolios that are ultimately option-like in their characteristics. So I, as a discretionary portfolio manager, if you hand me cash,”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“So the fascinating thing about that is, first, I completely agree, right? And I think that's actually part of the language that gets confused and lost on this. And so again, anytime you're transacting, you're not passive. When you decide to buy with your weekly contributions, you're not passive. What you're actually doing is you're transacting in a systematic fashion. So you are a systematic algorithmic investor that has a very simple rule. What do I buy? I buy everything. What price should I buy it up? Whatever price the market is offering me. That's presumed to be the right price, right? Now, anytime you buy, you've traded portfolios that are several hundred million to billion dollars in size. Anytime you attempt a transaction like that, you're going to influence the prices.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, yes, right. I think that's correct. And I do think you used a term that I think is really interesting, the relentless bid. Yeah, absolutely. And so when you start thinking about each of those individual components that you're talking about, first of all, it's really important to understand that all the literature that exists around active versus passive and the idea that passive doesn't meaningfully change markets actually presumes that it's simply a hold, that there is no transaction activity.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, the only difference in our definitions is actually the process of how you get to hold it. So, the natural conclusion that you're making is actually consistent with Sharp's paper, which is the idea that passive investors hold every security.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Passive, it's really important to understand that the definition of passive as it's stated, and this is true for the XIV, it's true for the S&P 500 in any form of index fund, the definition of passive is somebody who never transacts. If they transact every single day, then they're actually a different animal.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Sure. So the XIV trade was actually part of a broader What Lase pointed out in his paper was that passive had to transact during periods in which there was index rebalancing. And so in that period, they ceased to be passive investors. They became active investors. And that became an opportunity for outperformance. Now, the reason that that became interesting to me was I recognized one additional feature that Lase had not highlighted, which is that passive investors are always transacting because of the dynamics of flow. So you get your paycheck, you put 6% aside, that flows into various Vanguard funds. They're transacting on a daily basis. And just to put it in perspective, over the past couple years, Vanguard has averaged somewhere in the neighborhood of $300 billion worth of inflows every single year. That's the equivalent of a large hedge fund every single day having to deploy its capital into the market. And so when you think about this dynamic of is passive actual”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“You're in the same place 100%. And it's hard for people to understand that. So it's great to have the opportunity to actually share that. I mean, our industry tends to be among the most conservative investors out there precisely because we look at it and we're like, wait a second, if this risk goes wrong, not only do I lose my assets, but I lose my job.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, that's one of the funny things everybody discovers is you go through this industry when your compensation is tied to the outcome of the trade, you can absolutely express components of it. But the reality is that we're all massively underinvested in things like equities, et cetera.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“So we were actually ultimately limited by the liquidity in the space, but it was large enough that we were able to put a sizable amount of premium amount and make a meaningful amount.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Paul's observation, Paul Tudor Jones' observation, was that in an event that actually exacerbated volatility, the trading quantity that they would need was far greater than the market could supply. I had the exact same insight, exact same view, and simply pointed out that, like, look, there's a misunderstanding of an inverse product. You think like a normal stock, it's getting safer and safer and safer as it goes higher in price. But it's the exact opposite. That's the exact opposite. And so what you were actually building was a bimodal distribution, meaning two humps to the distribution, where there was a smaller and smaller probability that everything was okay and a bigger and bigger probability that all I think technical term is all hell was about to break loose, right? We basically came to the conclusion there was roughly a 95% chance it was going to go to zero over a two-year period. We ended up buying, this is one of the wonderful things about financial markets and degrees of completeness, there were options available with a two-year time horizon that allowed us to”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“100%. That's exactly the same underlying dynamic. And by the way, the model for the trade that I built was actually going back and reading Paul Tudor Jones' analysis leading into the crash in 1987. Portfolio insurance components, right? It was the exact same trade. So like down to the point that portfolio insurance was consuming somewhere around 30 to 40 percent of the volume on the S&P 500 on a normal basis.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“So the passive component of that, which will feed into the discussion we'll have later on, had just become so large that it relied on liquidity that was not necessarily going to be there, right?”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“When you run that full strength, it gives the dynamics of something like the XIV, which rose 600% in 2017, right? Now my observation was twofold. One was that because of the growth of this strategy, it had actually gotten so large that it was consuming all of the liquidity in the UX futures, the VIX futures. On normal trading days. It was about 70% of the daily volume was simply the rebalancing of these things. Wow.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the structure of the vault surface is generally upward sloping, meaning that people are more uncertain and price greater uncertainty about events far off into the future as compared to events that are relatively nearby. Now, when that inverts, when the VIC spikes on a risk-off event,”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Mean It should go up. The irony, of course, is that, like most of these trades that's out there, it's not quite what people thought it was, right? So the actual source of profitability in that trade is not the level of the VIX, but the shape of the Vault surface, right?”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“And so he was part of that early crop of venture capitalists in that late 1990s time period that I think started to think about it less on the pure technology front and more on exactly as I was referring to with Ren ⁇ Girard, the aspirational dynamics. What do people really want? Very few people want to quote unquote get onto a smartphone. They want to be able to connect with their friends. They want to be able to do math. They want to be able to get their email. They want to be able to do their work away from the office, et cetera. That awareness that that world was transitioning to the online space, I think is really what Peter's key observation was. And now it's interesting to watch him as he recognizes, I think in a lot of ways that people want other things in life, not necessarily just technology.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I don't think luck plays nearly as much of a role as people would like to think because it relates to Peter. I do think that a lot of the dynamics that we saw coming out of Silicon Valley, Peter was one of the first people to say, hey, wait, let's try to treat this like a business as compared to purely a scientific experiment.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, so those are pretty much the two extremes, right? One is certainly perceived as right wing in one way, and the other is perceived as very much left-wing. I don't care about the politics component. I care a lot about politics per se, but I very strongly believe that we're able to have our own opinions. There is a degree of discussion around those types of components in any setting, right? And so it is important that at least you're able to entertain that. Peter is unbelievably brilliant, right? He is one of these people who I think has a very intuitive grasp of order in the universe and tries to take positions that exploit those underlying dynamics. His familiarity with Renee Girard and the dynamic of mimicry and people's desire to imitate what other people have or to try to obtain what other people value, I think is kind of his underpinning philosophy and has proved to be really, really powerful in terms of identifying where the puck is going. You know, Peter.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“The Ice Man was somebody who would deliver the ice on a regular basis alongside cheese and various other components. And believe it or not, that was the seventh largest business in the United States in 1900. And by 1935, with the invention of air conditioning and modern refrigeration techniques, primarily by carrier, the entire industry is gone and everything files for bankruptcy. And so we actually picked up a vacation property that's just outside of exciting vacation destination just outside of Scranton, Pennsylvania, that was in the Poconot foothills. It was effectively a property that is between two, 3,000 foot mountains. And so in the northeast, it constantly stays cool. It was fed by five Artesians. And so this is the fantastic, most perfect place to grow ice hence the ice farm. And we had railroad tracks that went to New York and Philadelphia, et cetera. They're all abandoned long since abandoned. But that was the genesis of the name. We were always looking for a name to launch a firm.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“100%. That's exactly the idea. And so Scott actually approached me about joining Soros and I turned him down with the observation I've already got a great job. He immediately picked up on that, that the word job probably came across tapping into my entrepreneurial background. And he said, well, if you don't want to change jobs, would you be interested in running your own firm? We'll seed you. That's what led to Ice Farm Capital. The name actually, funnily enough, comes from a vacation property that I used to own. We sold it when we moved to California to follow in the rest of the career. But I owned a 19th century ice harvesting operation, which sounds insane until you actually stop and think about all the characteristics of what the world would have looked like in 1900. Ice was very much a business like cable television back then. You actually didn't own your icebox. You leased your ice box from the ice company. The ice man”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, so again, the Soros guys, in particular, Scott Bessant had actually rejoined Soros as the CIO at that point. He was the lead analyst for Stan Druckenmiller. And so he was returning to Soros. He basically tried to build a stable of outside managers that he thought were interesting and presented interesting ideas. Initially, same thing as Canyon Partners, basically trying to mean non-”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“So my actual background was originally in derivatives. My first job on Wall Street when I was still at the University of Pennsylvania was trading crude oil futures to offset option positions for spearleads in Kellogg. So I had a background in derivatives. The opportunities to trade derivatives and be involved in the hedge fund space was something that really had not emerged, at least for me in New York until Canyon Partners provided that opportunity. I just got lucky candidly that the dot com bubble broke about six months after I made that transition. If it had gone on for another two years, I might not be sitting here to talk to you today.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“And so we just made a meeting of the minds when they decided to branch out to New York City. It provided the perfect opportunity to transition to Canyon Partners. Initially, I joined to help them manage their equity portfolio. My background in the asset management space was originally going to small cap value. And Canyon Partners really gave me the platform that allowed me to branch that out into multiple different areas.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“I ran into Mitch on the street, actually on 57th, just around the corner from where we are right now. And he said, hey, we're thinking about opening a New York office. Is it us or is it Los Angeles? And the answer was it was Los Angeles. I didn't want to be in Los Angeles. My wife doesn't like to drive. I actually came like within inches of accepting a Canyon partner's offer back in 1998. And then I'm going from dinner at Ms. Shoeless's house to the airport. It's 11 o'clock at night on a Friday. Bumper to bumper traffic. And all I could think is if I do this, I'm done. My wife is going to leave me in about two and a half minutes.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it was very tight to the financial crisis, and so I'll tell you candidly that I thought there was a very reasonable chance that I was going to be out on my technical term in the financial crisis. You mentioned Dominique Mills, which is one of the fantastically talented people at Canyon Partners. She was based out in Los Angeles. And from kind of that 1996 introduction to Mitch and Josh, they repeatedly tried to get me to go to work for them in Los Angeles and finally, I think it was 2003 or 4.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“Incidentally, Mitch Jules of Canyon Partners was researching on the Internet in the early days of the Internet for valuation engines and insights, stumbled across our stuff and reached out and said, hey, could you link this to the public equity databases like CompuStat so we could use it for valueing stocks? That actually is exactly what we ended up doing. We were one of the last to get what's called a value added license to the CompuStat database. And so that then led to the sale of that business in the late 1990s to Credit Suisse.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“So that was actually an outgrowth from my experience coming out of Wharton. And you mentioned the transition of people who tended to be skilled at math or physics into finance. We forget that there weren't personal computers on everybody's desk back then. We forget that most people didn't have the skill set around Excel, et cetera. Excel didn't even exist. When I started, it was VisiCalc and Lotus, right? And so in the 1990s, I developed the late 1980s, early 1990s, I developed a skill set around valuation, in particular discounted cash flow or residual income type models, along with a couple of peers out of the consulting industry. We built a company that was focused on valuation, initially actually targeting corporate strategic planning departments, so working with companies like PepsiCo or others that were looking to either divest business units or to make acquisitions. They needed to have some mechanism to think about the valuation of these. That's what value add software was originally. It also was the path for me into the asset management space because”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source
“The initial career plan, actually, so I grew up on a farm in Northern California. My initial career plan was that I was going to go into science. I actually studied physics as a young man and then recognized that I was not actually nearly talented enough in physics to do anything of note. And so transition, like many people did in my generation into finance.”
2024-08-15 · Masters in Business · Mike Green on Why Passive Investing Is Hurting Market Structure · IDENTIFIED FROM THE TRANSCRIPT · source