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Sandy Rattray

lines on the record: 76
first: 2021-08-06
most recent: 2021-08-06
sittings or episodes: 1
sources: podcast

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“Bad to happen, and I can earn this very large insurance premium if I'm prepared to go short the VIX, and you, of course, can do that through futures contracts, but you can also do it through ETFs. I think my real observation on this, though, is I've tried to give as clear an explanation as I can of how this is working, but it's quite subtle. This is not a simple thing. And I think a lot of people that trade the VIC ETS don't really understand what's going on underneath the surface of the ETF contract and there's a lot going on underneath the surface.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“It'll go to 16. I can make 30% in three months. And they're absolutely right. You can and most likely will make 30% in three months. But and the but is a big thing. If something bad happens between now and September, then you can make very, very significant losses because the VIC can just very, very quickly go up to very high levels. So what people often do is they say that buying the VIX that gives me some protection against crises. If there's a crisis, then it'll likely go up. And they're right, but they do have to understand that it's not the VIX going from the current 16 to say 18. It's got to go above that 21 that's priced in in September before you make any money. But it can be a protection strategy, an insurance strategy. And then you've got people on the other side who say, look, I don't expect something.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Hedge itself with these futures contracts and these futures contracts will trade a lot higher. I said 21 for September versus 16 now. So that's almost 30% higher. And by September, one of two things has to happen. Either the VIX has to go up to 21 or the futures contract will go down to 16. More likely the futures contract will go down to 16. So I think people often don't understand this when they're buying a VIX ETF, but they're not buying the level of the VIX they see on the screen, on their television screens or on their Bloomberg terminals or wherever they see it, they're buying effectively a future on the VIX, which generally is trading a much higher level. And so they will have expected losses built in. That is something which then some people on the other side have said, well, this is very exciting. I can sell the VIX at 21 in September, and I expect...”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, I think there's a few things in there. Firstly, the VIX and the price of futures on the VIX will nearly always disagree. And generally, the futures will be higher than the current level. So, you know, as we're speaking now, the VIX is around 16, but a futures contract three months out is trading at almost 21, so five points higher. And that is a normal state of affairs. And as we talked about earlier on, volatility, because volatility can't go below zero, then people, and it can go to an unlimited upside level, then people generally, the market will overestimate volatility to give it a little bit of an insurance premium in there. Now, in terms of trading and investing with the VIX, I think this thing is quite important to know. So if you buy an ETF on the VIX, for example, then it is going to have to”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“It quite accurately, you can forecast it quite well as well. You can forecast volatility much better than you can forecast returns. So all of that is useful, but what's not useful is that we don't really worry in the end about what our volatility was last year or what it'll be next year. What we really worry about is how much we lost or how much we might lose, that sort of that pain threshold. And volatility doesn't really connect with that. Unfortunately, the really useful statistic drawdowns, very hard to estimate and people don't really estimate it. The other statistic volatility is useful, but in my view, not the most useful estimate of risk as we actually experience it.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“A very good question, and I think something I thought about a lot over the years, and there's many different versions of this, I think. So most models, most risk models do estimate. I'm pretty sure that both you and certainly I would never clue what the volatility of our personal portfolios was last year in 2020 in a very volatile year, but we have a pretty good idea of what the worst point is when we had the most losses or most pain in our portfolios. And that's got nothing to do with volatility. That's a drawdown. So in the end, actually, the risk that a lot of us really experience and worry about is drawdowns. It's not volatility, which is mathematical formula which describes the shape of a distribution. And that, I think, is something which is difficult because estimating drawdowns is extremely hard. Estimating volatilities is actually fairly straightforward. But the two don't really connect. And so why do people estimate volatility? Because it's useful. It gives you how wide the distribution will be. You can estimate”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Your description is absolutely correct. It's the market's expectation of realized volatility over the next 30 calendar days, but it has some features built into it. It's always going to overestimate because you're effectively selling insurance if you're selling NIVX and people don't sell insurance cheap for the most part.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, I think the word fear gauge or fear index is actually pretty accurate. But you're also absolutely correct that what the VIX actually is, is the market's expectation of volatility over the next 30 calendar days. And so it is a market price. And inevitably because the volatility cannot mathematically go below zero, there's no such thing as the volatility below zero, but it's unlimited on the upside. There's no limit to how high volatility can be. Then if you go to the market and say, hey, give me a price for the next 30 days of volatility, it's generally going to overestimate because it's going to have to protect itself a bit against the possibility of huge swings upwards and the fact that there's a floor, it can't go below zero.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“I called nine other banks and nine out of nine said they had no interest in supporting it. So it wasn't a particularly auspicious beginning. And it took a little bit of persistence. Now, today it's this huge market and it trades enormous volumes, but it's a good sort of lesson in terms of how difficult it is to get something new going.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Another good learning experience for me, which is at a boss at the time who said, look, you should talk to all the salespeople and find out if they're going to bring in business on this new VIX thing that you've been working on. So I spoke to the salespeople and we did a little survey. And, you know, I was going to retire on the proceeds of this survey. It was just amazing how much business we were going to do. Day one comes along. I wait for the phone to ring and it doesn't ring. Day two comes along. The phone still doesn't ring. And by day three you sort of get it. Nothing's happening. And amazingly the first significant trades we got done were actually with investors outside of the US and they were the people that sort of got the early stages of this new market in VIX going. The other thing that happened was my boss said you should call some of the other banks and see if they're going to support this thing.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“And another six months later, the CBOE, which until that point was only an options exchange, had launched futures contracts on it. And so there was a series of sort of lucky moments in there. A client came and asked a question. I happened to know Bill at the CBOE, so I knew somebody to call. They happened to be interested in launching Futures contracts and our timing was spot on. So there was a whole series of bits of luck along the way. And what really happened after that is...”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“I was quite friendly with a fellow called Bill Speth at the CBOE, who was head of research there. And I called Bill and said, you know, you have this VIX, but you make no money out of it because you just publish this thing and doesn't give you any income. And we've got an idea how you could change it to make it something that could be traded and maybe you could launch futures contracts on that. And so that might be interesting to you. And then I launched into a long description of the math behind that formula. And Bill very wisely said, you know, maybe you could send me a letter with that formula. So I sent him a letter, which was actually with the benefit of hindsight quite helpful because now I have a quite clear record of when we communicated this formula in 2003 to the CBOE. And within six months, we had a new VIX being calculated using this new formula.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Colleague Devashar ran options trading and I ran the Dorotus Research bit of Goldman. Got our heads together and I went and found the formula for the VIX as stood as pre-existed. And we worked out it just wasn't possible for us to do a trade on that. It wasn't designed in a way that you could hedge a trade on the VIX. So we came up with a kind of crazy idea, which was, okay, well, there's this VIX thing, which was owned by the CBOE, but you couldn't trade it, and there was a good reason why you couldn't trade it because you couldn't hedge it. So why don't we change it? And so we came up with a completely different formula. It turned out to give fairly similar levels to the old VIX, but it was a completely different formula, didn't use black shoals at all. And we thought, well, hey, this formula, actually, you could hedge a futures contract on or something like that. And so what we then did is...”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“In a barrier, in short, you get lucky. So the story behind it is, as we talked about in our earlier segment, I was working in New York to go and see clients. And every time you went to somebody's office, there'd be a TV screen in the FOIA, in the entrance area. And they would have prices of all sorts of things coming across that screen, you know, sort of the price of crude oil, the treasury bond yield, the S&P 500 level, that sort of thing. And it would have the VIX on it. And so there was a VIX, but the VIX was the only thing that seemed to come across the screens that you couldn't trade. And so the story really came because a colleague of mine at Goldman Sachs came to me one evening and said, you know, I've had this call from a client who wants to do a trade on the VIX. Could we do that?”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“No, no, I think that's exactly right. So I think the most investing strategies, including price momentum and equities, but most investing strategies have what people like me would call a left tail. They make you money most of the time, and then every now and then they serve you up an unpleasant surprise time series momentum does the opposite. Time series momentum most of the time gives you pretty boring returns, but every now and then it'll give you a very positive surprise. And that's really rare in investing strategies. And from my perspective, that's a very attractive characteristic when you're building portfolios to have a bit of something which does the opposite of most other investing strategies.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Excellent year, and that's because that second definition of momentum, what I would call time series momentum, or univariate momentum, that definition of momentum has very good protection-like characteristics. It'll pick up on a trend, especially a negative trend in markets and jump on that trend.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“But then there's a very different definition of momentum, and that's what the CTAs use. And they don't look at the price move against anything. They just do it in absolute terms, and they tend to do that in macro markets. So they'll trade the S&P 500 or the DAX or the Euro or gold or something like that. And that's a much different definition because it's not going long one set of markets or one set of stocks and short another set of stocks. It could be long everything, or it could be short everything. And it gives you a very different type of return profile. That second type has a very nice feature, which is that it fairly reliably will do well in bad periods in markets. So I talked about how, for example, AHL 2008 was an excellent year. Well, not many strategies that could say 2008 was an”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“factors and this explosion really is an overfitting exercise. It's people finding patterns in the data that don't really exist. And I think that's something that people should be very wary of. I've seen data providers and firms sell libraries of factors with literally hundreds of these things. And I don't think that's going to be a source of returns. The final thing I should say is that you mentioned momentum and momentum is quite an interesting factor because there are two very different definitions of momentum. One is really used by equities people and they will go long the positive momentum price momentum stocks and short the negative price momentum stocks. They sometimes do it with earnings as well. But basically go along the stocks which have been outperforming and short the stocks which have been underperforming.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“For example, I think generally don't have particularly high sharp ratios. So their returns adjusted for risk are not particularly high. But the idea that buying cheap stocks will never work again, I've never thought that was a sensible thing to say or think. But every now and then, you know, that's what this fellow on the front page of the journal said 20-odd years ago. So I think factors at least a core set of factors are very likely to persist, but they won't give particularly amazing risk-adjusted returns, but I think they are likely to give you positive risk-adjusted returns over a relatively long cycles. I would say though that one of the things I've seen in the last 10 years or so is as people thought they understood factors, then people started to find hundreds of these things. And I don't think there are hundreds of real factors. I think there's a small handful.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“As a European, I was working in New York in the late nineteen nineties and into the two thousands and I remember looking at the front page of the Wall Street Journal one day and on it it said value investing is for old people. And as a European, obviously Europeans want to live in old houses. Clearly in the US people mostly want to live in new houses. So there's a big sort of didn't quite understand the extent of the statement there. And it was a ridiculous thing to say. I was a young person being quoted in the front page of the Wall Street Journal right in the tail end of the tech bubble. And just before a huge outperformance of value stocks. So these factors, and we should talk about which of the factors that are likely to persist and which are not, but factors like value.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I agree actually with everything you said, Barry, except for the last bit about kind legenda era from my memory 20 or 30 years ago was probably less kind and less gentle than it is today. But let's start with factors. So I think one of the things which has been interesting over my career is nobody really talked about factors apart from a very small sort of quant group 20, 30 years ago. Today they're in, you know, they're sort of part of all our portfolio managers at Mangroup, whether they're quant or discretionary marriages. Everybody talks factors. And so that's been a big change. And they've become sort of part of, you know, just sort of general dialogue when people are talking about markets. The second thing I'd say is that I don't think that the core factors which have been around a long time are going to disappear. And for me,”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“funds which are more fundamentally driven, funds which are maybe trying to provide more protection characteristics or funds trying to maximize the sharp ratio. So we really tried to grow quant into many different areas. And I suppose my advantage coming into a place like AHL is that most people in HL and in the competitors had really grown up and had their whole careers in the CTA or the futures trend following. And I'd had none of my career in future transfollowing, but I had all these other influences that I could bring in. And so that really was how I worked with the team there to significantly expand the business, which was having a very difficult time and arrived. Decline to less than $10 billion of assets in the HL. And today we're many”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“Goldman years. And I can use a much broader perspective than maybe the futures trend followers had and look to develop a much wider range of systematic strategies. So when I arrived, we had a handful of models. Today, we've got three or four hundred models running in AHL. So we really expanded a number of models we're using. We expanded the number of markets that we're trading. So we used to trade futures and FX markets and my group had started trading OTC markets, but it was still quite small. And we really picked up and started to trade a much wider variety of markets. So now we trade around 700 markets around the world using systematic models. And then finally, we came up with different many different types of funds, so very short-term funds.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“So when I arrived at AL, which was end of 2012, was really a futures trend following business. It was CTA. And CTAs had been having a pretty difficult time really since the end of the financial crisis. They had a tremendous 2008, and then they'd really done nothing in the following years. So 9, 10, 11, 12 were all years which essentially added up to nothing. So we had this fantastic crisis year, very few Asa marriages could say that 2008 was a great year, but HL could definitely say that. But then you had a long dry period, and people were starting to say momentum doesn't work anymore. It's broken. And I think what I really did when I arrived at HL was to say, well, I've been involved in all sorts of different quant strategies in my”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“taught at universities I ducked out a little bit earlier on. And that got me into then thinking, well, I should use these skills. I end up joining Goldman Sachs. And there, again, I learned something, which was I thought the exciting bit would be the corporate finance areas, so advising on major corporate transactions. And what I realized was that that didn't really use the quant skills that I had. So I did that for a couple of years. and then I moved over to first fixed income research, then equity derivatives research, and then finally transitioned out of that into more proprietary trading and then into fund management.”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source
“So it's a long story. As a teenager, I thought I would become a theoretical physicist, and that was my ambition. I went to Cambridge University to study physics. And I really discovered a number of things at that time. Number one, I thought quite good at physics, turned out that I surrounded myself with a whole bunch of other people who were also pretty good and really standing out was hard. And second, I think at the time the amount of innovation that was taking place in physics seemed to have sort of dropped off a little bit from the 1970s and it was a sort of slow period in the late 1980s. And so that made me think, well, maybe I could use these math skills for something else. And that really got me into thinking about finance. So some people duck out of physics having done PhDs or...”
2021-08-06 · Masters in Business · Sandy Rattray on Strategic Risk Management · IDENTIFIED FROM THE TRANSCRIPT · source