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[Music] thank you welcome welcome everyone um so we're here to talk about active management styles in this environment in this inflationary environment as Michael Casey just mentioned and you know I'm always reminded you know we love the Alice in Wonderland memes and references in this industry and in the context of this conversation there's a perfect one to get us going which is this one where Lewis Carroll says in this place you have to run just to stand still and you have to run twice as fast to get anywhere and that's the world we're in when we think of things like consensus and common wisdom when it comes to active management and something like the 60 40 split that really helped Orient the industry with an agreed upon strategy seems to be sort of losing its ability to be widely agreed upon as a way forward and that's where we find Galaxy really pushing the boundaries on how to discover what the new um consensus model is for active management of course we're nowhere near an agreement on it but we've got someone who is exploring what this Frontier looks like so just to get us going here that context of an agreed upon strategy in the macro context how does Galaxy view that is the 60 40 piece and other forms of conventional wisdom do they have any utility any longer or are they completely useless and and we should abandon any reference to that common knowledge sure um so I think in investing sometimes finding something that's easy is what investors look for and the concept of 60 40 it's just very easy when investors are looking at their portfolio trying to come up with complex allocation strategies especially in the retail space is just a little bit past what their capabilities are so we're constantly looking for an easy model that somebody can replicate themselves and to be fair 60 40 isn't perfect for everyone particularly given different ages different needs but clearly in a world where we have to anticipate more and more financial repression from central banks to use that as one of their toolbox kits that 40 piece is going to become more and more difficult longer term to generate returns so when we're thinking about this we're thinking well how do you resize that 40 well it doesn't necessarily have to be zero but if the FED continues to use interest rates and quantitative easing as a method for financial repression they're forcing people out the risk curve and where on the risk curve should you go and where does cryptocurrency fit into that so I wouldn't say that's a 60 equities 40 crypto um but I think a portion of that is going to continually be uh directed towards cryptocurrency as the asset class continues to evolve and mature and as investors need to reach for that extra capital appreciation to make up for the for the lack of yield they're getting in their fixed income so you mentioned you know it's not so much beating the market as it is almost beating the policy makers has that change actually happened is that what we're actually talking about here that it used to be the 60 40 all that orientation was really about we got to outperform the market itself as a you know general idea of a simple thing it's a market but now that the policy makers are literally putting their fingers on different scales and changing the balance of that market um is that really like psychologically where a lot of asset managers are do you think about beating the FED now in a way I don't think about beating the FED but I I think about listening to the FED um you know clearly prior to QE um markets trended more in line with economic activity when economic activity starts to slow the FED can reduce rates to try and stimulate growth but now they need to supercharge that and they've used QE to really boost liquidity into the financial system um I think what we've learned and everybody knows the Mantra don't fight the FED is that you really can't fight the fed and that means don't fight the FED when they're pumping liquidity into the system and you probably shouldn't fight the FED on the other side when they're taking liquidity out of the system so I wouldn't say we're trying to to beat the FED in how we're investing but we're really watching and listening and respecting what they're doing with financial conditions and what that means for risk assets so it's it's still beat the market but the fed's relative influence on the market Still Remains a very relevant Factor when trying to come up with these strategies that can actually you know help you beat the market yeah and I would say the relevancy of that factor continues to go up yeah um and that I think is what brings us to the hardest part to chart when it comes to active management because if that you know sort of influence continues to change it'll be very difficult for us to come up with what you said the easy way that what 60 40 was once right now it seems like there's a million ways this could go and it's almost like every potential option is on the table including some complicated ones that wouldn't be easy that would require a series 7 license and probably an IQ of something that you know I wouldn't be able to contemplate in order to just beat the market whereas there was a time when you know anyone could beat the market because the the wisdom of by the by the index by the the top performers was good enough now within those multiple strategies almost a chaotic situation about what's out there how do you make sense of of deciding which potential strategies are right for you how do you start really deciding where the the holding part um ends and where the actual risky portion of allocation begins yeah that's I mean that's the Crux of the question really um I think what we've seen is and I'd be curious you've probably heard the word volatility if you've been sitting in here I don't know 60 times today um but volatility changes you know holding patterns with individuals and whether that's emotional or needs based but volatility also creates opportunities um I look at volatility as an opportunity so when we go back to kind of those passive Buy and Hold long-term strategies you're you're essentially saying to yourselves we're going to just weather the storm and we're not going to try and take advantage of these Market dips because we can't time that and that means that over time as policy makers reverse course and start to stimulate growth again that will be fine on the other side of that and with a long enough time Horizon you're fine you know from my perspective when you have this volatility and you have this signaling in the market you should be trying to take advantage of that on the margin um you know looking for opportunities to Pare down risk to increase risk and and reading exactly what those signals are to risk manage how you're doing that in your portfolio how do you within that context um determine for each individual right because everyone everyone sort of has a different tolerance for this stuff how do you personalize that that's the part that to me continues to seem complicated because if you have one situation that seems like it could work for the most amount of folks um you know is it really just their appetite and your counsel that allows you to shift that um you know barrier or that threshold in that way so I think the easiest thing to do then is to just size it appropriately for each investor you know right now in crypto there are a number of different strategies across Arbitrage Market neutral long only Etc but you know we're trafficking in a lot of the same types of Investments and a lot of the same types of tokens um you know the best way that I can think of right now to get to the retail level individual by individual is just make sure that the dollar amount that they're putting into it is appropriate for their risk profile and their needs but as we continue to build out the ecosystem them we're going to have more specialized products more Niche products kind of like inequities how you know we used to just have a few big index funds and now we have Factor ETFs we have you know style and and you know size market cap based strategies we're not there yet in crypto but as we continue to move forward I think we're going to be better able to pick the right strategies for specific investors and put those in their portfolio and you're starting to see I guess we had the Fidelity announced the metaverse ETF and not exactly related directly to the space but obviously it looks like a lot of the the incentives come from this industry that would would make them think this will work but how do you so we have this whole piece you know it's buy a Bitcoin and hold that's the the very simple easy you know probably good for everyone approach for for you know having some risks but also hedging it now I want to talk about that active piece right because when you open that up that's where the portfolio construction elements become I I think where a firm like yours is able to to Really distinguish themselves and understanding what would go in there because that's where you're starting to get into the complicated pieces for not just retail even people with tremendous amount of experience and a tremendous amount of of knowledge in the space would have difficulty so how do you get into that piece yeah I think first we have to understand exactly what the investment is it's not a commodity it's not an equity it's not a currency but it has elements of all three um so you know a lot of times I get the question well how do you value this and people want to see evaluation metric like you would see on an equity but it doesn't really make sense and then on the commodity side of course it's Supply demand based which is true also in crypto and then on the currency side with Bitcoin it's what what is the value of this what will someone pay so I think what we need to do really is to understand that we can't squeeze a a specific valuation model or perspective into an old asset class it just it won't work so understanding exactly how these tokens or digital assets are structured is step one I think number two is what's the use case what's the utility of this you have to really understand what the digital asset is solving for how many competitors they have who else is doing this how do they make money how does the investor make money all of these questions are very different than a traditional equity which is still difficult for a lot of investors to really grasp especially on the retail side where they think it's okay price goes up by but there's a lot more underneath that that we really need to understand before we're just putting Capital to work in specific tokens now you know what a woman named Susan athy who I believe was on the short list to be the Fed chair along with Powell did actually a bit of research in this field in 2016 or 2017 and she had a really unique perspective where she said we can actually take the the market cap of Industries and sort of reverse engineer the potential just not for valuation mode for portfolio projection construction and trying to understand that stuff she would say like you know gaming is this much of the economy so theoretically there's this much room to grow for an application in this industry as a percentage of of the total do you guys think and I don't mean the Susan athlete terms but do you think in terms of the potential for gaming for example and what portion gaming would hold in in a complete if you were to paint a picture of the future if you'd have one of these Risk Managers and forget that they're you know composing their vision of the future with numbers and spreadsheets imagine it is an actual you know science fiction movie and we're in the future do you guys think that way you know is gaming as it's going to be like a third of the the industry and so we need to find ones that would grow to that size and have the potential of that size is that is that something you do you reverse engineer a vision of the future and find it in a portfolio I don't think I'm there yet I think in terms of allocations it's gonna constantly be dynamic and it's going to change over time um and and you know this is true in equities as well when surprising enough Apple was bigger than the entire energy sector in the S P 500 and when you look at what's working this year energy companies are up substantially but they were two percent of the s p um they weren't always two percent back in 2005 they were closer to eight to ten percent so it's Dynamic based on kind of what else is coming out there so we could set an expectation for where we think gaming is and I can guarantee you we would be wrong um because there could be a whole other Market that we've failed to even consider would be a market or maybe game development tends to be a bit slower than we expected so I think a lot of what we're doing in terms of size is based on where the specific protocols and where those specific companies are at at this point in time and then making sure to scale that over time based on the new protocols the new companies or the Alternatives over time you know continue to present themselves so when you say you know we might get it wrong or we can make a mistake um you know I think of the once again the workhorses of this are these Risk Managers that are doing this you know Actuarial science that is highly sophisticated but of course these guys need to be able to bake in the opportunity to be wrong right it's important that they know how to be wrong and it not cost them everything so we saw even just recently with Tara yeah that's an example of you know I think anyway and correct me if I'm wrong but an example of you know we're taking a big chance um but how do you make sure you can take that chance with confidence what goes into that piece yes so risk I think is one of the most important things in in crypto that we can pay attention to um I actually you know the first four years of my career was in Risk so it's something that I hold very dearly to my heart um but you know you have protocol specific risk um like Tara where really understanding the Dynamics of how that works um and when it doesn't work what happens and then you have risk as well from a traditional risk sense you know volatilities drawdowns vars batting averages but you know risk requires a lot of data and a lot of pricing data and the majority of crypto tokens out there probably still have less than just a few years of pricing data so from a risk perspective we want to see mountains of data so that we can really bring down that confidence interval to be a lot more narrowed in on what the risk of that portfolio looks like and right now you just have to keep it wider because we don't have that much data so I think again it's an evolving asset class but as we're getting more data as we're able to really build out those risk models more appropriately to be similar to other asset classes I think that's going to really help in this whole risk reward equation that we're trying to do in constructing the portfolio so to bring this all um you know back to what you mentioned at the start how to make this easy and and coming up with a new consensus you know I use a frame that I think is is helpful that you know not even to get into accounting the Troubles of inflation are literally the psychological engine that helps the economy going perpetuating forward the reference of the US dollar as a you know a price for everything else you want to buy the minute that starts changing and becomes unreliable let's say um your your exponentially increasing the complexity of of what's going on how do you guys think of getting from that environment to an easy environment again right is it even possible in an inflationary environment is it even possible I I think it's very difficult um and I think we're in a very unique situation right now with inflation um partly because of the pandemic partly because of uh the current war and we can't replace a lot of those goods quickly it's not as easy as you know a manufacturer just ramping up production you know people in Texas know you know there's a lot of policy around fossil fuels and to really Drive some of that production higher you need a little bit more political support people have moved away from farming it's not as lucrative as it used to be and Tech and finance have pooled a lot of farmer children into industry so I think we have to kind of get through what I would consider a period of a bit of an anomaly um before we can really try to narrow down with certainty what those allocations look like because those allocations are going to look very different when you have all these extraneous factors which are really influencing financial markets got it well everyone I'm getting bothered by the thing here telling us our session's over thank you [Music]