Jacob Wohl might not have this level of patience right now, but I want to see his NFA audited track record over a five year period of time. Once this happens, then his strategy might be viewed without the dog whistles of concern.
- The Wohl gets attention, but consider the dog whistles of concern
- Bloomberg's Levine gets the humor but was put off by a long, awkwardly worded sentence
- There is a difference between "Wall Street" and the regulated derivatives industry
- Working in the derivatives industry sometimes takes the attitude as if one is defusing a bomb
- For anyone, expecting financial miracles to occur in investing is never a good strategy
There are dog whistles among those who understand algorithmic trading and derivatives. Certain words and phrases, such as “always staying delta and gamma neutral with naked options” in the face of crisis markets, can be said that can be heard by a select few, and this was the case with ValueWalk’s recent “Wohl of Wall Street” article. The Wohl was first spotlighted by a local TV station. But when credit or blame for creating The Wohl phenomena inside financial circles is assigned, it was the counter-culture financial insight on ZeroHedge, where the article was first published, that first claim for broadcasting The Wohl lies. ValueWalk, sensing a funny story with dry humor, followed up.
The Wohl gets attention, but consider the dog whistles of concern
After the most recent ValueWalk article was published, it received a fair amount of attention, some of it humorous. The general concept of young wunderkinds effortlessly performing financial miracles is always a good story, but in derivatives it is a dog whistle of sorts. Believing miracles might take place in long-only stock investing can take place without much damage, but in derivatives, with the potential to lose more than what was invested, it can be a suicide belt.
The truth is there are no financial miracles and any teenage fund manager who claims potential to consistently out-perform the beta of a market is a humorous topic once you understand the inside jokes. In fact, studies have been done that show fund managers who dramatically outperform the beta of their given alternative strategy — or don’t correlate to their professed strategy beta — are the ones most at risk of failure into the fund graveyard.
Bloomberg’s Levine gets the humor but was put off by a long, awkwardly worded sentence
[drizzle]
Bloomberg’s Matt Levine, a former big bank derivatives trader who often humorously if not meticulously opines on the hot market topic of the day, appreciated the humor in a March 30 column with a caveat:
The article is a very niche kind of comedy that not everyone will appreciate; I laughed uproariously but also became angry and uncomfortable, sort of like how I get watching “Curb Your Enthusiasm.” But the odd thing about this particular form of comedy is that, if you don’t have the right context, none of the sentences read like jokes.
Let’s use the Wohl of Wall Street to get everyone on the same page so we can all laugh at the inside jokes and, to a small extent, better understand the algorithmic and derivatives forces that are increasingly driving market direction.
There is a difference between “Wall Street” and the regulated derivatives industry
Understand that the derivatives industry is not the same as the sometimes conformist “Wall Street” culture, particularly the non-bank derivatives crew. Although it is rarely publicly acknowledged, there has always been tension surrounding “Wall Street’s” approach to derivatives and the lack of respect for the industry. (The book “Zero Sum Game” by Erika Olson captures some of this.) Even those working at major banks have told stories of how the “equity guys” just don’t get it. There is a method to manage derivatives risk that has been successful in the regulated derivatives industry for decades, but it is nuanced and complex and a minority of powerful executives on “Wall Street” have a track record of ignoring and disregarding this knowledge. Let’s call these people, a small minority in an otherwise strong talent pool on Wall Street, as the professional version of the “Wolf of Wall Street.”
Working in the derivatives industry sometimes takes the attitude as if one is defusing a bomb
Some in the derivatives industry have an attitude as if they are working for a police bomb squad, and this caution can be positive. Almost everyone with any real derivatives experience, bank or non-bank, has witnessed nasty explosions up front. When I was working in managed futures brokerage, I once had a client who was legendary in certain circles. His Greenwich, CT lore was that, after starting with a $10,000 account, he built it to over $100 million, then lost it all, went negative, and gained a large portion back. He ultimately parked nearly $10 million with my then Chicago-based non-bank brokerage firm after he had achieved a degree of “LaSalle Street” fame. Ultimately his picks of brokerage firms were not spot on, as he also had nearly $40 million at MF Global back in the days when brokerage risk was not as big a consideration with what some called “the world’s most secure account structure.” Those wild swings are not uncommon and tales of multi-million derivatives fortunes coming and going are commonplace in Chicago, which at one point housed more derivatives traders than anywhere else in the world.
In my conversation with the 18-year old Jacob Wohl, I did not detect that the precaution that a bomb-squad member has when approaching derivatives as I do in grizzled veterans. But the kid is 18-years old. His margin calls and life events are in front of him.
For Wohl to switch from long only equity investing, stock picking, to managed futures derivatives trading – particularly naked short selling of options – appears to this bomb squad-bruised veteran like a toddler making the decision to change his breakfast menu. Rather than milk, Wohl is breaking out the shots of tequila to get the morning started right – and eating the worm for extra protein.
Derivatives can be some of the most risky financial assets in existence, but for professionals they can also be the most cost efficient methods to attain certain exposures. Ask genuine investing legends Bill Gross or Ray Dalio, both of whom have acknowledged using derivatives as a cornerstone to their success over several decades. The key to dealing with explosives is proper care and handling. The core derivatives that have worked for decades keeping the regulated derivatives industry safe center on proper hedging strategy, transparency into real risk, proper margin usage and modeling both positive but especially negative probabilities. It also centers on understanding how a strategy is impacted by general market environmental elements so as to model performance, particularly during crisis.
The joke, in my opinion, is than an 18-year old brings aboard a former “Desperate Housewives” actress for “innovation” and thinks he can outfox the likes of Citadel, Virtu and other electronic market makers who have advantages he can’t even dream about. None of Wohl’s players seem to have an NFA audited track record — which is one of the major benefits of investing in direct managed futures CTA programs. Professionals who understand the industry deeply understand risk management best. This is the industry where the word “hope,” when used in a risk management setting, is not just politically incorrect, but cause for concern.
For anyone, expecting financial miracles to occur in investing is never a good strategy
Let’s revert back to one other note in Matt Levine’s column, an awkwardly written sentence in the original ValueWalk article that should have had more context:
“Wohl has moved from his parents ‘Inland Empire’ suburban house in the far west suburbs of Los Angeles to the Hollywood Hills and has added former ‘Desperate Housewives’ actress and derivatives trader Rachel Fox to his line-up” — umm, okay, you lost me there a bit?
I spent four winters in LA. The “Inland Empire” is somewhat like the Midwest – generally ignored by most of LA, but grounded by real people with real concerns. I’ve lived in West Hollywood. That’s the land of people mistaking dreams for reality, which is most often true for those who are new to the industry and have not seen it from the inside.
The dog whistles of concern are not only that an 18-year old kid who claims to have a new options pricing model but has not set forth peer reviewed documentation is just the start. Naked options selling is a strategy that has been noted to provide deceptively strong performance until crisis strikes, then it can wipe out traders. Many have fallen into the trap of this siren song. Despite the negative attention the strategy receives inside the industry, there are short volatility strategies that I have seen work over the long term, but they all have deep risk management plans during crisis.
Best of luck to Jacob Wohl. For an 18-year old kid he is well-spoken and ambitious. The test for all derivatives traders will come when the margin call capsizes their life. Learning from this experience can be tremendously valuable – and investing with people who understand both the positive potential and dangers of derivatives first hand is best advised.
UPDATE: In an email sent to a potential investor/subscriber and seen by ValueWalk, Jacob Wohl said the cost of the program is usually $4,999 and describes the program as what separates Steve Cohen or Ray Dalio from a kid doing spreadsheets. Further, this article was adjusted to reflect that Rachael Fox is not involved with the firm
