My guest today is Ateet Ahluwalia, and this is part one of my conversation with him.
Ateet is a Managing Director at CoVenture Crypto.
Prior to CoVenture, Ateet was a Macro Credit Trader at Barclays, a Macro Portfolio Manager at Bluecrest Capital, and a Credit Index Trader at Goldman Sachs. Ateet is a trader’s trader and a quantitative investor through and through. He’s also one of the most disciplined thinkers in our space.
I should note the one singular theme driving through this entire conversation is encapsulated by the phrase Ateet repeats over and over again, quote: “it’s all just a number on the screen”
Ateet’s entry into the space is indicative of an industry that’s evolving past offering basic exposure to investors to an industry offering investors the ability to allocate capital behind particular pureplay strategies.
- How his investment research during the Cyprus bailout led to him to Bitcoin.
- How the volatility of cryptocurrency compares to the US dollar in the 1970’s.
- Why Ateet is, in his words, “in the business of being good at being wrong.”
- The role that solo sports have had on his mindset as a trader.
- Why Ateet is hopeful that the SEC will regulate the space and provide clear guidance.
- The values of quantitative trading and why whatever idea you have must be quantified.
- Ateet’s issue with data in the space.
- How listeners might create a quantitative model based on magazine covers and peak hype.
Links Relevant To This Episode:
- CoVenture Crypto
- Bluecrest Capital
- Goldman Sachs
- Ev Williams
- Ari Nazir
- Neural Capital
- The Wall Street Journal
- The Financial Post
- Jamie Dimon
Terms Mentioned in the Episode:
Clay Collins: My guest today is Ateet Ahluwalia, and this is part one of my conversation with him. Ateet is a managing director at CoVenture Crypto. Prior to CoVenture, Ateet was a Macro Credit Trader at Barclays, a Macro Portfolio Manager at BlueCrest Capital, and a Credit Index Trader at Goldman Sachs. Ateet is a trader’s trader, and a quantitative investor through and through. He’s also one of the most disciplined thinkers in our space. I recently heard a few long time crypto trader friends talk about backing away from active trading and moving to more of a buy and hold strategy as the real pros enter this space. When they were referring to real pros, they were referring to people like Ateet. Ateet lives and breathes his quantitative models, and trains like a professional athlete. Folks, this is who you’re up against. I should note that the one singular theme driving through this entire conversation is encapsulated by the phrase Ateet repeats over and over again, “It’s all just a number on the screen.” Ateet’s entry into this space is indicative of an industry that evolving past offering basic exposure to investors, to an industry offering investors the ability to allocate capital behind particular pure play strategies. In part one of my conversation with Ateet we discuss, one, how his investment research during the Cyprus bailout led him to BitCoin. Two, why Ateet is, in his words, in the business of being good at being wrong. Three, the role that solo sports have played in his mindset as a trader. Four, why Ateet’s hopeful that the SEC
Clay Collins: will regulate this space and provide clear guidance. Five, the values of quantitative trading, and why, whatever idea you have, must be quantified. We also talk about Ateet’s issue with the data in this space and discuss how listeners might create a quantitative model based on magazine covers and peak hype. I should note that this podcast prides itself on featuring guest that aren’t on the conference circuit, are too busy generating returns for their investors to make time for interviews, or who haven’t done podcasts in the past. Ateet is no exception. In this, his podcast debut, please enjoy my conversation with Ateet Ahluwalia. Ateet, what’s the origin story of your involvement in cryptocurrency and cryptoasset investing?
Ateet Ahluwalia: I was trading Global Macro at the time in 2013. So before, to be perfectly frank, I thought it was just some kind of ridiculous video game type situation that had nothing to do with me or trading, or markets, or anything. But in the Cyprus bailout, I bought a lot of gold, I had some hedges, and frankly, none of them worked, and I wanted to figure out why. By pure fluke, I had a variance co-variance matrix that I used to look at lead-lag relationships, for example, and I had everything, gold, crude, S&P 500, the Dow, the Nasdaq, the top XYZ stocks that I was into at the time. As a joke, I had put in BitCoin in place of DAX, ’cause I had Euro stocks in DAX up there.
Clay Collins: Hey, it’s me cutting in here to tell you what the DAX is. The DAX is a market cap-weighted blue chip stock market index consisting of 30 major German companies, trading on the Frankfurt Stock Exchange. Back to Ateet.
Ateet Ahluwalia: I had left it in there. I’d done it several weeks earlier. When I was carefully going through why I had messed up something that I had historically always made money on, which is like turmoil in the Macro Markets. How could I not make money this time? Why was I flat on this trade? When I went through, I actually saw BitCoin actually had some correlation to the Cypriot crisis where they haircut bank deposits. And I’m like, oh my God. People actually, when times are tough and they have no other option, they will put money into this video game token, no pun intended, and they will actually use it as a vehicle to maintain savings when the government has failed them. That sparked my curiosity enough to start looking into it. But it really wasn’t until I got a real detailed look on BitCoin from one of my buddies, who’s frankly just magnitudes smarter than I am, and he really broke it down for me. He said two words that just blew my mind. He said cheap trust. Given my background and my history, the notion of trust is so critical in every form of relationship, financial, interpersonal, whatever it is. When he said cheap trust that’s when I really got involved, especially on the back of the Cyprus bailout.
Clay Collins: I have this hypothesis, that the people who are going to get into cryptoassets last are going to be poor people and the middle class in developed countries, because they’ve always been able to rely on their currencies. Whereas, in places like Zimbabwe, Venezuela, Cyprus, Argentina, they have distrusted their Fiat currencies for a long time, and got involved fairly early. Have you seen, in general, as a Macro investor, have you noticed that generally when these Fiat currencies collapse, that there is a flight to cryptoassets in BitCoin in particular?
Ateet Ahluwalia: Well, definitely. You can see that in the Argentina case, the Zimbabwe case, in the Venezuela case. You can see that just on the price chart. If you just look at the lead-lag relationship there, that’s definitely a viable relationship. If you actually think about why. I agree with your statement, first of all. I think the middle class in developed markets is the last to the party. I’d say there’s, I don’t know, I think read four to six stories on Bloomberg every single day about cryptocurrency, and that’s obviously a US geared audience on the Bloomberg US site. Only 8% of Americans own BitCoin. And I think over 90% of them have $500 or less in BitCoin. They haven’t spread their wings, so to speak, amongst the other cryptocurrencies. They’re not really in favor. So the media coverage is disproportionate to what’s actually going on under the surface. I agree with you that, it’s almost like a lack of knowledge that causes this issue. So it’s in the headlines, and it’s pitched by media as something inherently untrustworthy, which is ironic to the nth degree. But because of that, not very many people are getting in on it, but if they actually went back in time and looked at the US history, we’ve defaulted twice on our debt in the last 100 years. I mean, look, when Roosevelt basically confiscated gold from people, the fine was prison time or $10,000, if an IRS agent wasn’t able to march you up to your safety deposit box and confiscate your gold in exchange for US dollars. Now, then six months later, what do they do?
Ateet Ahluwalia: They devalue the currency by 50%, i.e. you lost 50% of your savings. That is a default, right? However you want to call it. In 1971 when Nixon cuts the US dollar from the gold window because we were bleeding reserves due to a deficit. It’s like, look, Europeans, we just don’t want to pay you anymore, so we’re detached. We’re de-tethered from gold. It’s not something we’re going to do anymore. That in effect, is a default as well. That actually is an interesting segue to another side point. People talk about cryptocurrency not being a real currency due to the volatility. Well, if you compare the volatility of cryptos to say, the US dollar and gold in the 1970s once we had de-tethered from the gold standard, well, yeah, that’s exactly the same kind of volatility you’re experiencing now, right? So, it’s a lack of education on the behalf of the developed market middle class investors, which is a deeper issue. Like look, we don’t teach financial savviness in elementary schools or high schools, right? It’s only at the college university, sort of the elite level, that people can get involved. Because we don’t do that, people don’t see how viable this asset class is, but just how important it is. Because a lot of people in the middle and lower classes just have been steadily chipped away at by policies that are in place for the last, call it, 30/40 years.
Clay Collins: What strikes me about the way that you view the world, or least how I perceive you viewing the world, is that, as a quantitative trader with a background in Macro, it’s almost like you coexist at two opposite ends of the spectrum. From the Macro perspective, you’re tracking global trends that are happening, how governments are responding to crises, how the wold is changing. At the same time, you’re watching it all happen in a very operationalized way on charts, and watching this stuff play out in a very numerical fashion. Do you think that’s how you’ve always been, or is that a function of your training?
Ateet Ahluwalia: I think that’s how I’ve always been. Because look, since we detached from the gold standard, we’re not a commodity based economy, right? So frankly, it’s all just a number on a screen. That’s one of my mottos when it comes to trading. If I think of it as just the number on the screen, it’s not being disrespectful. What it is is it forces me to look at something objectively, and then do scenario analysis. That’s ridiculous.
Clay Collins: Clay here. So I mentioned this during the intro, but it’s worth stating here again. The idea that it’s all just a number on the screen, is the central theme driving through this conversation. Listen for the number of times Ateet says this. He takes this approach not because he’s callus to their real-world implications of the numbers on his screen, but because his approach to investing demands the humility that comes with this perspective. If you want to have some fun, and you’re listening to this podcast at a party late at night, take a shot every time he says some version of, it’s all just a number on the screen.
Ateet Ahluwalia: So I’ll plan for, what if BitCoin goes to 1,000. What if it goes to 100,000? Having an open mind, by saying to myself, it’s just a number on the screen, it allows me to open my mind to different scenarios that could play out. I think, like look, after 2008, if I had told you, hey, we’re going to see S&P 500 rally from 666 to 2800 plus in 10 years, and there will be a three year period where there’s no dip greater than 3.5% in the market. You would have probably laughed at me. I mean, I certainly would have laughed at you if you had posited that theory to me. So, it’s all just a number on a screen, right? I just think that the price action tells you everything that you could know. Because frankly, there’s always someone smarter. There’s always someone more well-informed. There’s always something in the background you’ll never be privy to. If that’s the case, why not just look at the price and see where it’s going and respect it. Because, unless you’re Einstein, you’re not able to think on that kind of a level. I’m certainly not. So, it’s about respecting the price action, respecting what you see in front of you, and going on that basis. Because my career has been built on being good at being wrong, right? If you’re good at being wrong, then you can change your opinion on a dime. You can go with the facts. You don’t have any personal vested interest in being correct in any particular way. You’re just trying to figure out which way makes money. Inherently, that’s the right way. And so, you’re constantly course correcting
Ateet Ahluwalia: because you’re going to be wrong a lot in finance. So that’s kind of how I look at it.
Clay Collins: My grandfather told me that in relationships, especially with my wife, you can be right or you can be happy. I guess, as a trader, you can be right or you can be rich.
Ateet Ahluwalia: It’s really true. It’s just about a never ending search for what the reality is. The reality is you’re going to be wrong a lot. And the path it takes is never exactly how you think of it in your mind.
Clay Collins: So I have a product in entrepreneurial background, and one of the people who I most respect is a guy name Ev Williams. So Ev Williams was a founder of Blogger, and then he was a founder of Twitter. Most recently, he’s a founder of Medium. And so there’s been this very consistent theme throughout his career. It’s all been about producing and distributing content and creating platforms around that. I find that a lot of investors have sort of similar patterns. So kind of taking into consideration, all the things that you’ve done, I see you were a credit index trader at Goldman Sachs, you were a Macro portfolio manager at BlueCrest, you were at Barclays, and now you’re at CoVenture, what do you think has been kind of the common thread woven through those positions?
Ateet Ahluwalia: I always like solo sports. As a kid, I played golf, I ran track, I boxed. So if it’s a solo sport, it’s easy to kind of get along and see the results in the gratification, good or bad, right away, as opposed to relying on a team. That’s, as well, why I got into trading. If I have a good idea I can get into the ring, and I’m with Mike Tyson every day, because there’s big well capitalized investors, most likely taking the same or different positions depending on the time of year, or depending on the market, etc. So I get to go in, and I get to box Mike Tyson, or play ball with Michael Jordan every single day, and that’s a gift. That’s why it’s one of the best careers outside of playing sports that I can think of. The common theme that I started to realize is, if you don’t want to get knocked out by Mike Tyson, if you’re me, you have to quantify your results. You have to quantify the upside, the downside of your ideas. You have to have a clear log of why you’re doing what you’re doing, and then codify it so that you can see. well, in history, I’ve seen this trade play out 120 times. It’s got a max draw down of x, a max run up of y. That way when I’m looking at it, in the heat of the moment when I’m in battle, I’m not going to make a silly decision, thinking, oh, I better cut this. It’s down 4.5%. Well, I do know, based on looking at the numbers from the past, it can go down as far as 8% against me. I also know that the top 15 trades made 90% of the return. Look at BitCoin in the last year. The top 13 days made up the lion share of the returns
Ateet Ahluwalia: by an extraordinary magnitude, right? So, it’s about quantifying it, so that in the heat of the moment, I’m just making very calculated, calm decisions, and I can stick to my ethos. It’s just a number on a screen. If I’ve codified it, then I can credibly say that.
Clay Collins: One of the most profound things anyone has said to me about trading and investing came from the conversation we had at the CoVenture LP meeting. You were speaking about the competitive nature of markets and hiring people to work on your team. What you articulated to me was sort of this idea that when you are investing you’re competing against everyone else who’s participating in that market. There is no little league, right? There’s no farm teams, right? Everyone is playing against the best people operating in that market. When you go to hire, you need to hire people who can operate at that level. Can you expand a little bit on that idea for me, because it really brought a lot into view for me?
Ateet Ahluwalia: It’s an interesting thing that a lot of people think of work life balance, and obviously, we all do to some degree or another. But for me, I just want people around me that view this as a hobby. If it’s a hobby, for something to be a hobby it has to reach a threshold in you mind of being so fun that you’re going to dedicate spare mind share to it. Then it end up becoming the lion share of whatever you’re focused on. So if you view it as a hobby, you’re not thinking, oh, man, I have to get in again. I can’t believe the weekend’s over. I’m going to have to work till 9PM. If you’re really in it, and it’s your passion, then you’re going to go after it like guns blazing. You’re going to be relentless like an attack dog. So the kind of people that I like working with, and one of the things that drew me to CoVenture in the first place, when talking to the partners, it was clear that they were taking some of my calls. I was in London. They were in New York taking some of my calls when it was like 9PM in New York. They clearly needed to get to dinner, but they were so excited talking about this after a full week of work, that we were going back and forth arguing about the merits of a trade strategy, or a thought process, or value investing. Whatever it was, we could argue about it, have like an intelligent, energetic debate. Finding people like that, that view it not as a job, but as, I don’t know, man. Almost like, passion’s so overused, but just excited.
Clay Collins: A vocation.
Ateet Ahluwalia: Yeah, people who are just excited. ‘Cause if you’re excited you will do whatever it takes, and you’re not thinking of the difficulty, you’re not thinking of the problems you might encounter. You’re like, problem, got to fix it. This is coming up, need to go there. Someone’s saying go left, I’ll go left. It’s not working, I’m going right, now. Let’s figure it out. So having people around you like that, it’s one of those things. Like if you put me in a room for 30 days, I can come up with a really great strategy on say, Cocoa Futures, right? But if I’m in there with another person, and he or she is thinking, has the same kind of nerdy desire to figure it out like me, it could take five days. That’s obviously, they’re arbitrary numbers, but there’s a non-linear exponential brain power that happens when you’re in the room with people who view things as an exciting task, as opposed to a task, or a chore.
Clay Collins: Interviewing folks in this space has been a really interesting experience and also a challenge. One of the things that this show is trying to accomplish is to provide listeners to a look at a bunch of different ways of seeing this world. For the most part, the hedge funds and the hedge fund managers that I’ve spoken to, they don’t really have a thesis, or even pure approaches. That’s not a dis on them. I think it speaks more to the reality that the earlier fund in this space were primarily about getting exposure to the asset class, versus having a pure quantitative approach, or a Pure ICO approach, or a pure momentum, or sentiment based approach. What I’m really looking forward to with this interview, and why I’m excited to talk to you, one of the many reasons, is that you do bring this kind of pure play quantitative approach to markets and investing. Do you think that’s indicative of the maturity of the space that we’re kind of going from, just basic exposure to offering investors a range of different options when it comes to approaches in this space? I don’t want to say funds.
Ateet Ahluwalia: I think, basically, the mentality has shifted, right? Because when you go through an exponential move like 2017, you get more eyeballs on the space. Therefore, that brings a diversity of views and styles to this space as well. I think that’s critical, because frankly, if you just woke up any day in 2017 and said, you know what? I’m going long. You’re a genius now. Well, not right now, but up until say, mid November 2017. So, it’s about the maturation of the asset class as a whole. I think it’s up to each individual, like what suits them emotionally. I’ll give you an example. You talk about indicators and what drives me. One of my favorite things is, I know how to emotionally hedge myself. So if I’m looking at the S&P, and I want to buy S&P 500 contracts, for example. But I know that I’m waiting for it to fall another eight points to go into buy range. If I’m really anxious, I’m like, if it does that then it’s going to fall into this bucket for this strategy. I think it’s a win. I’m worried that it won’t even dip that much. I’ll just buy a quarter of the position now. ‘Cause if it takes off I’m emotionally hedged. If it doesn’t I’ll just buy the other three quarters where I’m supposed to and stay disciplined. I know me. I know my emotional fabric. Therefore, I can act accordingly to make sure that my mind is as clean and clear as possible going forward so that I managed the risk appropriately and take out as much as I’m supposed to in the traditional asset classes, right? That’s one example of one facet of one style. I think other people have their views,
Ateet Ahluwalia: and thankfully, the asset class is getting flushed out, and there’s more. We’re in the consolidation phase where the hype cycle gets to consolidate, and hopefully, the tech cycle will catch up to it. That’s going to bring a variety of strategies for whoever wants to get involved, and whatever their emotional make up is, whether they’re value people, or quantitative people, or hyperactive people, or VC type people. I think that’s a testament to the maturation of the space.
Clay Collins: About half of our audience is institutional investors and people that come from the traditional financial world, and are interested in crypto. But another significant portion of the demographic that listen to this show are people that are native to crypto, and because they’ve held for so long have come into a significant amount of personal wealth, and are actually learning about the traditional financial world and about sophisticated investing strategies, perhaps, for the first time in their life. So for that latter group, could you explain how a quantitative investor approaches markets, thinks about trades, and I guess, in particular, might approach this crypto space?
Ateet Ahluwalia: I speak in one plus one is two, kind of very basic first grader language, because that’s how I process things from an engineering stand point. It’s just easy for me. If I was someone who was just new to finance and getting involved in this phase, the number one caution I know that everyone probably already knows this, is beware of famous people on TV saying and doing one thing or another. During the European Sov crisis, one of the most famous bond investors in the world said that the UK was sitting on a bed of nitroglycerin. No joke, while he was doing that, his execution desk was selling insurance, so selling CDS protection on that exact country. I’m watching CNBC and hearing this. I’m getting a call from someone. I’m passing it to the guy next to me who’s trading UK CDS, and I couldn’t believe it. Beware of all these stories and what can and can’t happen. Get a really good IRS tax lawyer, and make sure that you’re paying your taxes and doing everything you’re supposed to do. I think the best way to approach it is just to look at position size and common sense. Like for me, I think that there’s maybe a handful of people with 14 PhDs that are qualified to audit every line of code in any different project in the space. Therefore, it behooves that the average investor, or early investors to size appropriately, because liquidity is king in this space. I mean, if you own 100 of something that has 120 units outstanding, congrats, well done, but you really are going to have a problem.
Ateet Ahluwalia: As soon as you drop one or two units everyone’s going to know where you stand and where this is headed. So I think it’s about maintaining a rational position sizing in a space that’s coming up to speed rather quickly. The other reason for that is, you really need to be aware that, I’m hopeful that the SEC will come in and regulate this space, and that’s something that I’m very passionate about, and I really hope happens quickly. It’ll add legitimacy to the space. It’ll allow big institutions to invest in the space without breaching fiduciary duty. If you look at something like BlackRock. BlackRock has six trillion under AUM. If just one basis point, so one-tenth of a percent comes in there, that’s 620 million bucks. That’s 10% of the space from one company with a big balance sheet. There’s probably 100 out there globally that we could list. If I’d listed them you’d be like, oh, yeah, I’ve heard of them as well. So there’s a lot that come into this space, but while you’re thinking about it from someone who’s held it from say, an average cost basis in the hundreds, there’s no reason it can’t go back down there from a gut check on regulation, because people overreact both ways, right? You saw it in December. You saw it in January. People are going to overreact. It’s going to move any which way it wants to because it is just a number on a screen, because we’re in the hype cycle, and the tech cycle simply hasn’t caught up. So, hopefully, they’ll be good regulation that comes out around this space that allows it to really grow,
Ateet Ahluwalia: and mature even further, and build out, because I don’t think enough people are cognizant of the fact that at 300 plus billion, there’s still a non-zero delta that the space looks very different, and could be materially smaller in 10 years from now. So it’s important that people think about that and size accordingly. However they want to get up to speed in terms of just traditional finance, or where to redeploy assets, or how to think about it, is really something that they should active pursue. Then the other thing is, in addition to regulation, there’s custody. I think if you see a top tier custody solution for people, that also eliminates a lot of barriers, again, from a fiduciary standpoint for some of these big institutions. But also, it reduces the intimidation factor for medium and smaller size investors. That also liquefies the space. That’s what it needs. It needs more liquidity and more regulation, and that’s only going to come from custody, and frankly, the SEC and CFTC getting even more involved. I know that’s the worst thing in the world you could say to a pure form libertarian crypto person. But at the end of the day, we kind of have to be adults and say, look, these people have to get involved. At the end of the day, this does rest in the hands of some of the more institutionalized regulator type people. It’s important that they’re involved, and they’re active in that discussion, because it’s just going to legitimize the space. When it’s legitimized there’s more money ultimately flowing into the space,
Ateet Ahluwalia: which improves the tech, and improves it for all of us. That’s the beautiful part about the space. It’s not like in traditional finance, where people look around, and they’re jealous, and it’s a zero sum game. Like, oh, man, Clay made X, and that’s bad for me, ’cause I look a certain way. It’s not that. It’s like, oh, wow, Clay made X, fantastic, ’cause that means the rising tide is contributing to everyone having success. People have that viewpoint in this space. So, I think we just need to be more realistic.
Clay Collins: When I hear that someone made X it’s like, when the four minute mile was broken, it’s like, oh, well, I can do that too, right? I’m as smart as that guy.
Ateet Ahluwalia: That’s such a phenomenal point, right? Because then there’s the avalanche of everyone started breaking the four minute mile, right? So, that’s a great way to put it. I think people in the crypto space do look at it that way. So, every time I hear a success story, it’s just more fuel to keep pushing hard.
Clay Collins: For people that, I guess, are native to crypto listening to this but don’t have much background in investing, how would you describe quantitative investing? Like if you were teaching a class, Quant 101, what would you say during your opening lecture of that class about the topic and about this subject matter?
Ateet Ahluwalia: I would say, lesson one, it is very arrogant to think that you could pick tops and bottoms. Therefore, whether you believe me or not, I’m going to have you keep a trade journal. That trade journal, you’ll write down what your idea was, why, what your target is, what your stop is, and then you’re going to follow it every single day. Just one idea, just one. I guarantee you, even in the one idea, even if you are right, you’ll start to acknowledge the elements of luck, you’ll start to acknowledge that I was right for the wrong reason, or I was wrong for XYZ reasons I didn’t even think about, sort of the unknown unknowns. I think if one person honestly followed just one of their trade ideas, they’d realize that so much of what they thought has nothing to do with the success of the trade; therefore, whatever idea you have must be quantified. So I’ve tested probably 1,000 ideas, and frankly, I’ve got just five of them that have been robust enough to look at on a consistent basis. That’s a testament to A, how wrong I can be, but B, that you need to quantify your ideas before you can say that they have any kind of edge, before you can even have a conversation around robustness. It’s a humbling exercise, but ultimately it’s extraordinarily profitable.
Clay Collins: That’s really beautiful, and I love how pure that is. How would you say quantitative investing is different from maybe VC style investing, momentum based investing, and maybe other forms? What do you think is the main differentiator?
Ateet Ahluwalia: First of all, quantitative investing can have momentum components. It depends on your strategy, right? You can have Rel Val strategies, ORB strategies, momentum strategies, volatility break out strategies. It can be a number of different things. I think it’s different from VC, in that VC doesn’t have a mark to market. It’s just a light switch. It’s a binary trade with an X year time horizon. It’s going to be a one or a zero. It’s that simple. The beauty of it is, you size, that’s why the position size sizing’s so critical. VC’s not going to put 90% of it’s capital into one company and hope, right? It’s going to spread it around, sort of, not shot gun it, ’cause that’s a little bit crude, but they’re going to spread it around. They might sector diversify, or within the sector diversify even further and really take a wide swath of companies and put them in their portfolio. If one or two of them pan out, that really pays for 50 or 60 losers. It’s actually not that dissimilar to trading. The only difference is, we’re not looking at binaries ones and zeros that have no mark to market till the end date. We have to deal with the mark to market everyday, and we’re not as deeply involved in it, because it is a number on a screen. So if I buy BitCoin because X reason tells me to, I know that it’s got a 93% edge, which is absurdly high. Let’s call it 63% edge, well then, that’s why I bought it, right? But with a VC, you’re like, I met the founder. I thought about this. I thought about that. For me, it’s like, okay, here’s what I codified. I understand my upside and my downside,
Ateet Ahluwalia: and liquidity is king. Therefore, even if it’s a great idea, if there’s no liquidity, I won’t do it. Whereas in VC, another difference is, you’re looking at something knowing it’s illiquid, and knowing that you won’t be able to exit until it’s reached a certain amount of critical mass. So there are a few similarities and differences, but that Venn diagram, I think it overlaps a lot more than people think, but in a few critical ways, namely mark to market and position size. It can have quite drastic and different psychological and P&L results.
Clay Collins: So would you say that quantitative investing is about documenting your hypothesis, or hypotheses in purely quantitative forms, executing against those hypotheses either in simulations or with real assets, and then measuring the results, and then tweaking that process over time with more hypotheses and more data points?
Ateet Ahluwalia: I think that’s a pretty fair summary. I mean, it’s just saying that, look, I want to know the actual numbers. I want just the facts. Over time I’ll monitor it. Look, there’s system decay, where I might have to change an assumption or change a variable input. But it’s having the numbers behind it, and saying, here’s a lookback period. Here’s exactly what has happened in the past. I can then draw comfort from that, as opposed to saying, I feel XYZ. Well, if you feel it then quantify it, right? The humbling thing is, I might feel 100 strategies that might work. I’m telling you, Clay, this has worked every single time. Then I quantify it, and you’re like, hey, what happened? I’m like, it didn’t work. That happens 99 out of 100 times. So it’s about knowing the raw facts. Now, obviously, historical performance is not indicative of future performance. 100%, obviously, that’s the case. But it’s about having as much ammo as one could mentally before going into something realizing that things change.
Clay Collins: Do you think it’s sometimes advantageous to have blinders on, like to actually suppress access to certain types of information because it might distract you, and instead focus only on the numbers? Or is that, in general, a bad strategy? Do you take in all the inputs you possibly can?
Ateet Ahluwalia: That’s a really good question. There’s a bit more nuance to it. So I think that one of our partners, Nikhil, is all over the fundamentals. He can tell you everything about everything relating to a fundamental variable point on any cryptocurrency. So, it’s good to speak with him because in doing so, I know what is and isn’t liquid. I know what is and isn’t reliable in terms of looking at a strategy, right? Looking at it from that point, it is important to have information. I mean, the space is evolving so quickly that it’s important to just be on top of different developments because that could have an outsides fundamental impact in this space because it is illiquid overall, and because we don’t have flushed out regulations just yet. So it is important to have fundamental inputs in the back of your mind so that it can determine position sizing, for example, or it can determine the way you think about things, or play in the background. But in terms of the actual quantitative investing itself, that’s a numbers game, and that’s determined solely by the numbers. I think, as an overlay, one would look at some of the bigger picture information inputs just to make sure that in a liquid space one doesn’t get silly and treat it like the S&P 500 when it clearly isn’t.
Clay Collins: A lot of investors and hedge funds in this space are primarily executing buy and hold strategies. I know you’re playing with a bigger pallet, right? Can you walk us through the kinds of trades that you execute? Are you shorting? Are you buying options? I would just love to hear a run down of the types of trades you’ll execute, and then also, maybe the types of trades you wish you could execute but just don’t have the infrastructure for it yet.
Ateet Ahluwalia: I can’t actually talk about that, but what I can say is that as the space gets more liquidity and more players come to the market, hopefully, there’s ways to both go long and short, and cater to every investment style. You got value investors. You’ve got momentum investors. You’ve got people who want to invest in the latest VC type thing, and looking at ICOs. I just hope for the space, that it continues to get flushed out. I think it will. I hope that good quality regulation comes in so that we can see the space. I think what we’ve seen was a remarkable boom in 2017 that kind of fed on itself. But getting the good regulation in there will allow bigger pockets of capital to come to the space, and allow the tech cycle to really expand.
Clay Collins: Can you not speak to that for proprietary IP reasons, or for regulatory reasons?
Ateet Ahluwalia: Regulatory. It’s at least a third of my mind that is always on that, like just making sure we do everything that one could possibly do by the book.
Clay Collins: Being squeaky clean. We’re not going to get the regulation we want unless that happens.
Ateet Ahluwalia: Exactly.
Clay Collins: Could you tell us a little bit more about the quality of crypto markets right now? One obvious thing is that the S&P 500 and global equities markets, and Forex are more liquid. Are there any other differences in quality from those markets and crypto markets that sort of immediately struck you when you started exploring this space?
Ateet Ahluwalia: If you look at ICOs, it’s the wold’s first backwards market, where
Clay Collins: You go public first.
Ateet Ahluwalia: Yeah, you go public first. Like, okay, so, Clay crates a company in the real-world. Clay works his heart out. He hires a bunch of employees, maybe raises some private financing. He’s working day and night, and 10 years later he’s got products with real metrics and customers behind it. He decides to IPO on the Nasdaq, for example, and he cashes out. It’s a 10/15 lifelong journey, whatever it is, right? Here, people pitch ideas, and they just come to market, and there you have it. The IPOs happen, the ICO, and then there’s hopes and prayers. It’s kind of the late tech cycle kind of mentality that you saw in the late 90s, early 2000s. Which is, again, why I want good regulation to come to the space, ’cause the real dev teams doing real technology work that are actually making an impact and disrupting industries in a specific and productive way, those guys need to get the money. That’s something that I’m constantly mindful of. That’s one notable difference, is the ICO versus IPO, the way that that works in terms of the logic behind it is not wholly there. The flip side to that is, look, some people that don’t have money, that could be, we’re allowing the kid in Wichita, Kansas, who’s 18, who’s a genius, that can’t afford to go to Harvard, or wherever he needs to get to in order to take the necessarily course work to enhance his genius even further. He has access to capital to build on a project that could end up changing the world in magnificent ways. Right? So I’m cognizant of the nuance behind it,
Ateet Ahluwalia: but I do firmly believe that we need regulation in this space just because we need the guys. If he’s that good, I hope to God he finds a way into the right space. But the guys that have dev teams are doing quality work, they need to be allowed to really go hard at it and not just be worried that either capital or unnecessary harms come into the space by a bunch of jokers who are just playing around. The other difference between commodity markets and equity markets is the time period. So, if I want to look at a strategy, I can look back to 1993 when the SPY was created, the ETF, and look at a rich dataset.
Clay Collins: Hey, it’s me again, saving you from having to Google stuff while you’re driving. If you didn’t know, the SPY is an ETF designed to track the S&P 500 stock market index.
Ateet Ahluwalia: The beauty of that dataset is if Clay looks it up on Yahoo Finance, or Ateet looks it up on exchanges itself, we will get the exact same data for that lengthy period of time. Here, BitCoin’s 10 years old, but you and I would have to look across 100 different exchanges now. The data quality’s quite poor. You have to constantly think there’s no regulation around that data. So it’s like, what is the actual quality of this data? Are they just interpolating between two price points as opposed to, here’s what actually traded, and it’s a non interpolated dataset? Is is, are we looking at legitimate data?
Clay Collins: Okay, time out. I’m going to do some native advertising for the Nomics API. Ateet just mentioned how crappy the data is in this space. Well, that issue is exactly what the Nomics API addresses. The company I co-founded, Nomics, offers squeaky clean and normalized primary source trade data offered through one fast and modern API. Instead of having to integrate with a bunch of exchange APIs of varying quality, you can get everything through one screaming fast fire hose. If you found that you, or your developer, have to spend too much time cleaning up and maintaining datasets, instead of identifying opportunities, or if you’re tired of interpolated data and want raw primary source trades delivered simply and constantly with top notch support in SLAs, then check us out at nomics.com. Okay, back to the show.
Ateet Ahluwalia: The other thing is with ICOs you have survivorship bias, right? If something went away in July of 2017, you just don’t have data on it. So there’s differences in the quality of the data. There’s differences in how you collect the data, the availability of the data, the sources of the data, and just how people report data who do have the data. So there’s so many differences between them, and I think that’s getting better, right? It’s definitely getting better. But it’s just such a massive difference in terms of, it’s night and day, really.
Clay Collins: So, so far, the things we have are liquidity, data, custodianship, regulation, this ICO phenomenon. Anything else that comes to mind?
Ateet Ahluwalia: I’m thinking about it. But top of mind, I so badly want security and custody, those two things resolved. I don’t think people understand just how big the, real quote on quote, real traditional finance is relative to cryptocurrencies, and the fact that this is such a nascent technology. Ignore the 2017 mania. There’s so much capital on the sidelines that has a potential to come in just because of the sheer size of the market, but also because we just don’t have quality regulation and too many quality custodian formations as of yet. People hate me for that, by the way. I get so much grief talking about it. I’m like, guys, I just want this to be legitimized. When it’s legitimized, yeah. I’ll give an example, in 2006 I joined Goldman, and I saw them move people from distressed debt. In London, we had half a person, and no one, thinking about distressed debt. Well, in 2006, late 2006/2007,
Clay Collins: Oh, no, here it comes.
Ateet Ahluwalia: They moved a ton of guys into distressed debt. They’re like, we don’t know what’s going to happen, when it’s going to happen. We do know this. We do know that everything trades type, CDS for certain countries are nine basis points. I think Italy was 16 at 18, which means you could pay for default insurance on Italy for 18 basis points on your notional. That’s it. That blew up to several hundred basis points, even just as recently as a year ago, right? So it’s one of those things where people were so risked up, and there was just no risk in the system whatsoever that it was a situation where people were just like, look, we don’t know how this happens, or what happens, but something has to happen, right? So let’s just move a few people there. Same thing in late 2008, when commodities were getting absolutely obliterated. 2009 kind of time frame. Well, there had been a bubble on the way up, but they then started moving people back. Like some of their smartest people in other areas, they move them into commodities. They started moving some really, really terrific people into Europe in 2009-10 kind of time frame, because they’re like, look, maybe this has, I’m just speculating, but they have a uncanny ability to kind of just say, look, well, this has happened. Okay, so that’s going to sort itself out. We know that when there’s an issue, there’s kind of a rise in crest of the wave. Then the wave crashes and has to settle. Well, what’s the next potential area where different risk metrics are kicking off, but people aren’t really noticing
Ateet Ahluwalia: that the volatility around those metrics is picking up. So they move people in a very intelligent way, and I don’t think it’s a Goldman specific thing. It’s just that’s where I cut my teeth. That’s where I had most experience. It was a fantastic experience. They’re now talking about starting a crypto desk, and I have no insight into that whatsoever. But even the CEO is very public about saying, I’m not going to discount this as an asset class whatsoever. He’s very public about talking that there needs to be regulation, sure, but they’ve also discussed cryptocurrency as an internal product. I would love that. I welcome that with open arms. Legitimize the products further. Let’s do it. Be like a big impetus to this rising tide.
Clay Collins: For some of the beginners listening to this when it comes to quantitative strategies, could you walk us through what exactly a model is? I think we all have conceptional ideas about what they are, but for someone just getting started, how should someone think about the discipline of creating models? Are they algorithms? Are they a set of constraints? If we want to sort of dip our toe into this strategy, how should we think of models? What concretely is a model, and how do you execute against that operationally?
Ateet Ahluwalia: That’s a really good question. It’s basically having a set of inputs that give an output, and that output is quantified. So you can have an input saying, one of the indicators I like looking is at the magazine covers. So when the economist has a particular person, they said, the return of the dollar, they had George Washington, a really buff caricature of George Washington on there talking about the strength of the US dollar. That, obviously, marked the peak of the US dollar within a month. Or you see Abenomics, and they have the head of Japan, Shinzo Abe, with a superman cape on. His fist forward, and it’s another caricature, and that obviously marked the peak there of kind of the advances a couple years ago. There’s always a fancy magazine cover that kind of captures positive sentiment in the public sphere at it’s height. So you can say, how do I trade that? I always know that they’re wrong. Well, you can say, let’s do it. Let’s pick a subset of the economist, and look at every magazine cover going back 10 years. Pick, here’s where the hyperbole comes in, and I’m going to do the exact opposite. You can quantify that. Say, here’s what it is three months before, one month before, the day of, the week after, the one month after, the three months after, the sixth, the year. You can quantify it like how you look at that. So inputs, magazine cover, output, buy or sell trigger. Quantify that buy and sell trigger at different snapshots in time. So that’s a very basic way to do it. Look, there’s people who do it in the microseconds,
Ateet Ahluwalia: more like milliseconds, and that’s high frequency guys in the S&P 500 in every futures contract known to man. Then there’s more latent strategies. So in the five minutes and above minutes to daily to weekly. That’s more swing trading. Then there’s buy and hold long term investors. But I think that, nowadays, everyone uses some way to quantify it, whether it’s a magazine cover, and they’re doing it in discretionary or quantifiable basis, or looking at it and saying, every time a fed governor speaks I want to buy the dollar against the yen, for example, or the dollar against the Aussie dollar, or whatever it might be, and quantifying how that moves. So there’s different ways to do it. It’s with fundamental indicators, and that can be things like current account deficits, budgets, interest rates, exchange rates, and kind of coming up with a thesis based on fundamentals and where you project things going. Then there’s doing it on numbers. So more technicals, and not technicals like charting, which is largely self-fulfilling, but numbers that can be quantified in the price action. So every time we close above X moving average, for example, eight times in a row. That being an incredibly basic example, there’s two ways to look at it. So you have to look at timeframe, and you have to look at input. In a very broad way, that’s kind of a nutshell. Timeframe, input, fundamental, or price, and go from there.
Clay Collins: I like the magazine cover example because that’s something that everyone can relate to, and potentially build a model off of. So the last interview that I did is with a really smart guy named Ari Nazir from Neural Capital. He talked about how he actually executed a number of trades. He essentially, shorted every single cryptoasset that appeared on CNBC Fast Money. He was actually pretty profitable with this. So, that’s something that’s, again, the magazine cover, that example, that’s really interesting. So that’s an example of when you would take a short position. Playing with his example, how would you decide when to liquidate that short position?
Ateet Ahluwalia: I guess it could be whenever it hit a predetermined target based on your analysis, or it could be whenever conditions change. So maybe CNBC starts talking about, oh, it’s fallen so far so fast. There’s different ways to do it. I’m not really sure how he looks at it, but he might have quantified how much do these things fall, and this is what I think, and XYZ, and this is why I’m taking it off here. Or he might just have a different way of doing it. It might just be an arbitrary criteria. It might be quantified. But someone who’s kind of in my vein of looking at things, it’s going to be quantified.
Clay Collins: So, something, potentially, that would just be like, hey, we’re going to build a model on this podcast, would be take a short position when something appears on CNBC Fast Money. When your position has appreciated 50%, you could test that, right?
Ateet Ahluwalia: You could definitely test that, yeah.
Clay Collins: There’s a percentage of people that appreciate this. Can you tell us a little bit about operations? What is a day in your life look like? What are your priorities, and what do you find to be the highest ROI activities that you do every day?
Ateet Ahluwalia: My day starts between 4:30 and 5:30 in the morning. I invest a lot of time in reading, because the space is evolving so quickly. I want to know what’s happening in regulation, what’s happening in custody. I want to know what’s happening in the top 20 currencies and assets. I want to know what other intelligent people in this space are thinking. I just kind of absorb it in a very brute force manner. There’s lots of good sources for that. I mean, your podcast is a great source for that, for example. There’s a lot of different resources now in the Cryptosphere. So it’s about getting all that in my brain, because I never know where an idea gets a spark from, while I digest all that data. It could be a walk to go get lunch, or going to meet a partner in the firm, or just someone in the space that’s doing something really thoughtful or has a different viewpoint. You get, by reading all that information, your subconscious kind of crunches away at it, and all of a sudden you’ve got an idea. But that spark might have developed from something I read at 6AM on Wednesday two months ago. For me, in my process, that’s incredibly important. I think that has an extremely high ROI, even though I can’t quantify it in an exact way. The other thing is talking to the incredibly intelligent people that I work with. So, I’m just kind of blown away at how hard they work, but also, their depth of knowledge around the Cryptosphere. So I feel totally comfortable asking questions that I think might be a little silly, for them to even hear given where
Ateet Ahluwalia: they’re at in their journey of absorbing the Cryptosphere. But that’s another great place. That’s an incredibly high ROI. They can direct me to different resources and look at different ways to kind of manage that. Then also, sitting in a room by myself, and kind of thinking on the best way to examine this space fundamentally, technically, however it is. That’s the lion share of my day. I do a lot of scenario analysis around the space, where it could go, thinking in terms of, it’s just a number on a screen. Okay, but what if this happens, or what if that happens? Doing a lot of scenario analysis, I think, is very helpful for me. Because then when I see a headline in the space, or someone’s talking about XYZ project, then it’s not like I have to do a deep dive, and it’s unfathomable. It’s, oh, okay, cool. So we can talk about that. Let’s go off on that tangent and examine it. Yeah, and the rest of the time it’s just building strategies.
Clay Collins: Let’s talk about sort of taking the first part of that, reading and ingesting information. I’d love to get a lay of the land for your information universe. I think there’s often very, maybe legitimate sources of information. But I think everyone also has sort of this place they go to that maybe they don’t always talk about, but that includes like Telegram groups, odd Twitter accounts, various rumor mills. I’d love to hear about sort of the range of information sources you have, and how you think about them.
Ateet Ahluwalia: Yeah, so the range of information sources stems from the traditional finance stuff that I just can’t quit, like the Wall Street Journal, the FT, Bloomberg, the basic sources that you think would be where you’d look for things, because they’ll be the first one to report on when Jamie Dimon says XYZ, or whatever. A lot of times they actually have good facts around, okay, this is how many ICOs were released this year, or this is how much trade volume happens in XYZ plays. There’s about 15 different websites that I think have good thoughtful analysis around it, that isn’t just some dude pounding his chest about how this is going to revolutionize the world, which I believe, by the way.
Clay Collins: What are a couple of those?
Ateet Ahluwalia: I don’t need to repeat it. I get you. I’m with you. You’re preaching to the choir. However, I’d really like some facts today. There’s several blogs and just daily newsletters. I check out about 15 different websites on a daily basis. Then I can’t stress enough just how intelligent different contacts I have in this space, most of whom I work with, can be when it comes to discussing various ideas, or them having a source, or have you checked out this article from this thing that they read that I never even thought of. I just get sent a few dozen articles or thoughts a day. Then I will follow certain people on Twitter, just because they’re just thoughtful. It’s not like they have to be some guy, like the Bill Gross, or the big dogs of this space. There’s some really thoughtful people with really high level analysis, that’s just some guy in Nebraska, or some lady in Germany. I’m just like, okay, cool. I’ll take that because you’re thinking in a way that is incredibly humbling, because I hadn’t even considered that, or even been on that kind of path before. So I’ll follow them as well. There are Telegram groups and all that, but frankly, there’s a lot more noise than signal from those sources.
Clay Collins: Hey, I’m going to cut in here and show for our Telegram group. You can find it at nomicstelegram.com. It’s pretty good. Not a lot of memes. Pretty good signal to noise ratio. Check it out.
Ateet Ahluwalia: This is going to sound really bad, but I like the fact that I’ve got intelligent people around me that kind of filter through that, and they like doing that. So then they can just tell me the important meat on the bone, and I don’t have to waste time doing it. So if I want to sit down with Suvneet, we’ll have an intelligent conversation, or Jeff Williams, or if I want to sit down with Nikhil, or Ully. These guys are top level, and they cut through all the nonsense. It’s just easy for me.
Clay Collins: Could you give us just a few, maybe like two to three, diamonds in the rough, like maybe super valuable information sources that are off of most people’s radar that you found to be informative?
Ateet Ahluwalia: I think the number one place is podcasts. I think people don’t realize that there are like 15 different podcasts, and I realize that’s kind of a headache to go through them all. But look, you walk to get lunch. You walk to your office in some capacity. You’re on the subway, or you’re in the car, or wherever. You’ve got a good two hours in any given day to kill. So instead of watching a YouTube video, or whatever, you can knock out one or two podcasts. If you listen to it twice the fast forward rate, and then rewind in spots where it’s incredibly thoughtful analysis, you can knock out two plus in a day just doing mundane activities. I do do that. I also think that Bloomberg’s actually tremendously under rated, just because they’ll have short three paragraph articles, but one will have quantified something in a certain aspect, which incredibly intelligent and thoughtful. Sort of like BitCoin transaction volume by country breakdown. That’s thoughtful. It’s not going to enter into my day to day, but it’s something that I’d like to see and think about, ’cause it’s going to be the seed for a conversation with someone down the road. That someone, maybe you and I might be talking at dinner, and it’s going to be something incredibly thoughtful that you say on the back of me mentioning that that’s going to change the way I see things. It’s going to cause me to see a different angle. I think that people really shouldn’t discount someone based on their age, or based on their geographical location. This isn’t like traditional finance, where you’re like, oh, I trade in New York,
Ateet Ahluwalia: or I trade in London. Forget that. There are people randomly out there, and if they have thoughtful analysis, I would follow them on Twitter, ’cause chances are, they have a very good way of looking at things. You have access now to a stream of information that other people aren’t necessarily thinking about. Those would be my two gems, I think.
Clay Collins: By the way, I did not pay Ateet to mention podcasts. I’d love to learn a little bit more about your tool stack. Technologist often talk about their tech stack, or developers might talk about their range of programming lanugages that they use to accomplish things. What is your tool stack look like? Are you using Excel? Are you using R? Are you using Python? Can you just walk us through sort of the range of tools that you use to do what you do as a quantitative trader?
Ateet Ahluwalia: It’s everything from the things that I read and the sources of data that I kind of accumulate, and then to the platforms I code on. I think an under valued piece of that puzzle is the people I talk to. So I try to make it a point to get out three times a week with people, at least three times a week. I was in New York for 30 days, and I was out I think 28 of those 30 days, including weekends, with people in the space, just absorbing everything I could like a garbage disposal. But I think that the stack can’t just be like, oh, I program in Python, and therefore, I have XYZ. You have to be thoughtful, because the space is evolving so quickly that you need to have a broader kind of macro overview not only of the space but the players in it, the data, everything around it, liquidity. My toolkit is really broad, but that’s also kind of why I work where I work, because there’s a lot of, that Venn diagram has so much overlap. Where it doesn’t, there’s such a uniqueness in skillset that it’s just like, cool. Instead of spending the next two years figuring out X, I can just talk to so and so. After 30 minutes I can have a very good basic education, and then off I go in my tool stack of information, platforms to program and trade on, and take it from there.
Clay Collins: So, that concludes part one of this interview with Ateet. Next week we’ll air part two. In this upcoming episode, we’ll play a lightening round game of underrated overrated, and dig a bit more into Ateets thoughts on regulation. See you next week. That’s it for this week. To sign up for our free crypto investing newsletter, listen to other episodes, or get the show notes from this episode. Please visit flippening.com. I also invite you to check out the startup that funds this podcast, Nomics. Spelled N-O-M-I-C-S, nomics.com. Finally, if you got value from the show, the biggest thing you can do to help us out is to leave a five star review with some comments and feedback on iTunes, Stitcher, or wherever you listen to podcasts. Thanks for listening and see you next week.