Financial Products for Hedging with Vest Co-Founder Jeff Chang

Summary

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Masters in Business: Financial Products for Hedging with Vest Co-Founder Jeff Chang

Host: Barry Ritholtz (Bloomberg) | Guest: Jeff Chang, Co-Founder & President of Vest
Date: February 27, 2026
Main Theme:
A deep dive into defined outcome investing and buffered ETFs, exploring the origin and growth of Vest, the mechanics of hedged products, and lessons from the intersection of Silicon Valley startup culture and Wall Street rigor.

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Episode Overview

Barry Ritholtz interviews Jeff Chang, co-founder and president of Vest, a pioneer in outcome-oriented investment strategies, notably buffered ETFs. The conversation ranges from Chang’s unorthodox career path (Naval Academy, CPA, Wall Street, Y Combinator) to the technical, developmental, and philosophical underpinnings of building financial products that aim to take the uncertainty out of investing by using options for downside protection and income generation.

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Guest Background & Early Career

• Diverse Origins: Chang’s journey goes from a failed flat-screen TV business to becoming a CPA for security and skills, highlighting the importance of foundational business knowledge.
  • "One of my mentors once told me...there's FU money and FU skills." (03:58, Jeff Chang)
• Lessons from Failure & Grit:
  • Learned the necessity of hard skills and resilience after his initial venture was outcompeted in the commoditized TV market.
  • "I realized…I needed actual hard skills that created value add. And…you always have to have…a safety net." (03:58–05:06, Jeff Chang)
• Developing Grit, Influence, Creativity, and Intelligence (he ranks grit as most important):
  • "The optimization…when I have kids...I would optimize for actually, number one, grit...Second is influence...Third is creativity...And then the last…is intelligence." (06:33–08:40, Jeff Chang)
• Military & Early Finance:
  • Grew up in Annapolis, briefly attended the Naval Academy, and credits military discipline for his strong work ethic.
  • Gained experience at the World Bank, Freddie Mac, FBR, and ProShares, developing expertise in accounting, mortgage trading, and risk management.
  • “Trading repo during the '08 September…that’s the month I lost all my chest hair.” (12:02, Jeff Chang)
  • Saw firsthand the dangers of leverage and the importance of risk management.
  • "If you're highly leveraged, it's usually pretty fatal." (13:07, Barry Ritholtz)

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Founding Vest & Product Philosophy

• Inspiration:

  • Inspired by the shortcomings of structured notes (notably counterparty risk in the 2008 crisis) and the need for better client risk management tools.
  • "When the tide goes out, make sure…the money we manage…we got pants on." (13:45, Jeff Chang)

• Silicon Valley Meets Wall Street:

  • Vest’s DNA fuses Wall Street expertise with Silicon Valley’s startup culture, though Chang notes that “move fast and break things” is not suitable for regulated asset management.
  • “Move fast and break things…is not the right ethos for managing other people’s money.” (22:28, Jeff Chang)
  • Y Combinator experience brought rigor, resilience, and a focus on solving painful, specific customer problems.
  • “YC always says…make something people want…start with the problem.” (21:17, Jeff Chang)

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The Y Combinator Experience

[16:58–25:49]

• Accepted by Y Combinator in 2015 after three years building Vest without salary (“lived off our Wall Street bonuses…no pay for four plus years”).
• Emphasizes YC’s all-star network, partnership-building, and clear orientation to problem-focused innovation.
• "If a former trader on Wall Street ends up in Silicon Valley…you may end up in a ditch because…you have to go four years, no pay, sleep on the floor." (25:21, Jeff Chang)
• Advice from YC: Focus on pain points, be customer-centric, and iterate quickly—though always with the discipline required by market regulations.

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The Buffer Fund Model – Mechanics & Value Proposition

[32:32–41:45]

• Buffer Strategy in Practice:
  • Example: S&P 500 exposure with the first 10% protected on the downside, and capped upside (e.g., cap at 15% annual gain).
  • "If S&P is down 10, you’re flat for the year…if S&P is up 15, you’re up 15…if S&P is up 16, you’re up 15.” (34:50, Jeff Chang)
• Downside Protection as Wealth Preservation:
  • Designed for clients in the “stay rich game,” not the “get rich game.”
  • “These types of strategies are in the stay rich game…if you have wealth, you just don’t want to be poor.” (36:40, Jeff Chang)
• Making Hedging Accessible:
  • Addresses compliance and scalability barriers that prevent advisors from offering option hedges by integrating options inside the fund.
  • Draws on behavioral finance: “Make it simple, people will use it.” (Richard Thaler’s “nudge” theory applied to options.)
  • "Think about options as apples…we had bagged those apples to make it easier for the user…" (38:52, Jeff Chang)
• Target Audience:
  • Primarily financial advisors and professionals, not direct-to-consumer.
  • “100% of our focus is in financial professionals…those are the people we're solving problems for…” (40:06, Jeff Chang)

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Hedged Income Strategies & Other Products

[44:49–50:41]

• Income Generation:
  • Focus on covered call strategies across asset classes—equities, fixed income, gold, even bitcoin—to monetize volatility and boost yield.
  • Notable ETFs:
    • KNG: Dividend Aristocrats with covered calls; yields over 8% in recent years.
      • "For a company to grow their dividend 25 consecutive years…that’s a stable business…filters for good corporate governance." (46:28–47:11, Jeff Chang)
    • HYTI: Covered calls on high yield (HYG), double-digit yields.
    • IGLD: Covered call gold ETF.
  • Partnership with CBOE enabled innovations like extended trading hours for GLD options to match ETF close, facilitating these products.
    • “Today, GLD options stop trading at 4:15. That's because of us.” (50:41, Jeff Chang)
• Defined Outcome in Crypto (DeFi ETF):
  • Strategies targeting high yield by writing covered calls on crypto assets (e.g., DFII; yields quoted around 18–19%).
  • Rolls weekly, to maximize premium decay (“like selling football tickets as kickoff approaches”).
  • "Every week…you have the potential to generate more yield because you're always capturing that extra decay." (54:52–55:03, Jeff Chang)

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Investment Philosophy: 3D Risk Management

[41:45–44:42; 59:27–60:42]

• Advocates for portfolio risk management beyond the traditional stocks/bonds split, recommending a “3-dimensional” approach via hedged funds.
  • “Still diversify, but think about other ways to shape your return…think about income generation…think about risk management beyond diversification.” (59:27, Jeff Chang)
• Stresses the limitations of relying on historical negative correlation between stocks and bonds, especially if inflation returns.
  • “What in your portfolio is going to save you if 2022 repeats itself?…Commodities, great, but it’s a timing trade…I’m not smart enough to time that trade.” (43:39–44:13, Jeff Chang)
• Important for “stay rich” clients to diversify sources of risk management.

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Failure, Iteration, and Cultural Lessons

[30:41–32:06; 58:36–60:42]

• The difference between East Coast (Wall Street) and West Coast (Silicon Valley) views on failure:
  • "On Wall Street…it’s called a blow up. But on the West Coast…it’s expected …failure is just the mother of success." (30:41–32:00, Jeff Chang)
• Emphasizes learning from failure and the importance of pivoting, not giving up.

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Memorable Quotes & Moments

• On Option Use & Market Psychology:
  • "Old option traders don't die, they just expire worthless." (57:40, Barry Ritholtz)
  • “If you're writing calls…think about this: if I collect a $2 premium and the stock goes up $1…I just buy the stock back...It gives you a buffer to repurchase stock not at a loss.” (56:07–56:42, Jeff Chang)
• Navigating Market Downturns:
  • "When the tide goes out, make sure…you got pants on." (13:45, Jeff Chang)
• On Audience:
  • “We stand side by side with the financial professionals that manage…wealth.” (40:39, Jeff Chang)
• Cultural Crossover:
  • “Our background…is Wall Street…There is no move fast and break things…” (22:28, Jeff Chang)

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Other Notable Segments

• Timestamps for Key Topics:
  • [02:28–08:40]: Chang’s early career, grit/intelligence matrix
  • [13:07–14:25]: Lessons from financial crises & risk management
  • [16:58–25:49]: Y Combinator & Silicon Valley ethos
  • [32:32–41:45]: Buffer funds, ETFs, mechanics
  • [44:49–50:41]: Covered-call and income products
  • [53:43–54:30]: Crypto/DeFi income ETF
  • [59:27–60:42]: Portfolio construction and risk management

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Closing Advice & Reflections

• Career Guidance:
  • Develop portable, durable skills; don’t fear failure; look for “pain points” you can solve.
  • “Develop the skills so you’re not beholden to anybody…keep your eyes out for painful problems you…can solve.” (70:50, Jeff Chang)
• Industry Wisdom:
  • The biggest advantages often come from not realizing how steep the climb will be when starting out.
  • "If you saw how big the mountain is, it would be…nobody would do it." (73:11, Jeff Chang)
• AI and the Future:
  • Forecasts that the next wave of transformative companies in AI may still be in startup mode today.
  • "Who's going to dethrone Nvidia? The founder…hasn't graduated high school yet." (61:52, Barry Ritholtz)

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Recommended Reading (from Jeff Chang)

• Liar’s Poker, Michael Lewis
• Influence: The Psychology of Persuasion, Robert Cialdini
• How to Win Friends and Influence People, Dale Carnegie
• The Intelligent Investor, Benjamin Graham

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Final Takeaways

This episode offers a rare window into the convergence of Wall Street discipline and Silicon Valley entrepreneurship in today’s investment-product innovation. Jeff Chang’s journey illustrates the value of grit, adaptability, and second-order risk thinking—both for entrepreneurs and investors seeking to preserve and grow wealth in unpredictable markets.

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Transcript

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[Jeff Chang]

Bloomberg Audio Studios Podcasts Radio News

[Barry Ritholtz]

this

[Jeff Chang]

is Masters in Business with Barry Ritholtz on Bloomberg Radio.

[Barry Ritholtz]

On the latest Masters in Business podcast, I sit down with Jeff Chang. He's co founder and president of vest. They are a firm that specializes in defined outcome investing, buffered ETF ETFs. They try and remove the uncertainty of outcomes of your investing by using options and derivatives to come up with very, very specific products. I thought our conversation was fascinating and I think you will also with no further ado, my podcast with Jeff Chang Jeff Chang, welcome to Bloomberg.

[Jeff Chang]

Great to be here and thanks for having me.

[Barry Ritholtz]

Well, thank you so much for coming. I'm kind of always fascinated by people who have unusual or diverse backgrounds. You in particular U.S. naval Academy and then an MBA from Georgetown. Is that right? What was the original career plan?

[Jeff Chang]

So I grew up in Annapolis. The original career plan was to be, you know, be part of the Navy and unfortunately I got medically discharged for asthma and then decided to pursue more of a business path and that's what kind of Led me to Georgetown. And then after Georgetown, I actually, right after, I actually always wanted to start my own company. Right. In fact, this is kind of a funny thing. Most people don't know this. I've never actually said this. When I first started, I actually started a flat screen TV company in 2012. Oem them from China. And do you remember back in the day, like flat screen TVs used to be like 25. Oh yeah.

[Barry Ritholtz]

When they first came out, they were crazy.

[Jeff Chang]

Yeah. So I was in D.C. selling those. In fact, I remember selling TVs to Reagan National Airport. So when you like look at what terminal you are, back in the early 2000s, those were Jeff Chang TVs that were there. I think another client was Six Flags. Like when you.

[Barry Ritholtz]

The wait. How long the wait?

[Jeff Chang]

Yeah, yeah, exactly, exactly. But then, you know, as TVs became further and further down, like I was like, hey, that's not the business I want to be in.

[Barry Ritholtz]

All commoditized. Why do you want to be there?

[Jeff Chang]

Yeah, all commoditized. So it taught me a lot about up starting a business on, you know, that and about life is that I realized that I needed actual hard skills that, that created a, you know, value add. And also the other component was I. I also realized that doing like accounting books, I didn't pay too much attention in accounting. So I actually for six months went and studied for the CPA exam and took the CPA exam to be accounting. Which was actually a twofold kind of reason, I think one of my mentors once told me is that like, hey, there, there is for the better word, there's FU money and fu skills. Right? You don't have that money, so make sure you build skills in which you're not always beholden to other people. And if you thought about it, that you know, the two guaranteed things in life is death and taxes.

[Barry Ritholtz]

Right.

[Jeff Chang]

And so in my head was I didn't want to be an undertaker, but I could take the CPA ex and assure that.

[Barry Ritholtz]

Participate in taxes.

[Jeff Chang]

Exactly, exactly.

[Barry Ritholtz]

A growth industry.

[Jeff Chang]

So that was the reason why I took the CPA exam was that like, hey, I know I would never starve because, you know, after the failure of my first firm, I was like, hey, there's. You always have to have at least a safety net. And that also informed me that when I started a new company, accounting is actually extremely important when you're starting a firm or even a startup for that matter. And it actually came to pass that that has been a very, very important part career path as well.

[Barry Ritholtz]

So it's certainly a useful set of skills. But I'm going to assume the first business didn't fail because of bad accounting. It's just a hyper competitive market with razor thin margins. And as stuff as economies of scale came out.

[Jeff Chang]

That's right.

[Barry Ritholtz]

The market just dies for that.

[Jeff Chang]

Yeah. And that really informed me is that you have to have an edge. I think over the 13 years of founding this company, I noticed that there were actually key features that I noticed even going through Y Combinator. My classmates and people that built very successful companies, they had very common characteristics for their success. Right. In fact, I had Asian parents. They optimized for intelligence, which was very. You get straight A's, you play the violin or the piano, and you kind of go through that.

[Barry Ritholtz]

They're optimizing for Ivy League admission is what you're implying.

[Jeff Chang]

Exactly, exactly. And. Or be a doctor for that matter.

[Barry Ritholtz]

So different from Jewish parents.

[Jeff Chang]

Exactly. So it was. And then as kind of over the years I realized that the optimization, like if, you know, when I have kids, because you know, I, I don't have kids, at least none that I know of, but if I did, I would optimize for actually number one is grit. Like that. And that grit is the not giving up. Like, like, you know, your company fails, what's the next thing? Like you, you know, you pick up yourself from your bootstraps and you get up and go. It's almost like the thing is, like, as an example, my parents didn't let me play video games, Right. But I realized video games actually, if you introduce grit, like, you know, if you play Call of Duty, like I was the guy that when I play Call of duty in my 20s, I would buy the, the headphones that would let me hear whether or not someone's behind me. Because whatever it takes to win, like that type of. You ever see that kid that does not want to lose, that like fails, but then gets up and figures out a way to win? That is grit. And I resil.

[Barry Ritholtz]

Resilience is more important than anything else.

[Jeff Chang]

And then the second is I realize that nothing in this world can be done alone. That success requires you to have partnerships, friendships, and know people that can help build great things. Great things don't come by yourself. And that's what I think. Second is influence. Your ability to let people see your dream and believe in your dream. Think about this like if you're starting a company, not just selling your product requires influence. Like convincing your first investors, your first employees to quit their jobs, their high paying jobs to make almost nothing and take equity. Let's talk about like selling a dream. That's influence. Like think about, you know, some of the greatest entrepreneurs out there. They, you know, you probably heard like, Steve Jobs is a reality distortion field. You know what that is? That's influence. Right. That is one of the key things I think when, when you're looking at business, influence is such a, a key thing of, of something that required to have success. Because like I said, nothing in the world alone. This third, which comes back to my point is creativity. The ability to spot things that other people don't see. Right. To basically be to see opportunity, to see things, to combine things together and have that opportunity. Then the last, if you combine it, is intelligence. If you do all four, and I can give you examples of people are immensely successful just with grit. And by the way, it's in that order. Grit, influence, creativity and lasses intelligence.

[Barry Ritholtz]

So I want to stop you there for a sec because I want to spend time going over Y Combinator. I want to talk about vest, but before we get there, I mentioned the Naval Academy. You have such an unusual background. Talk a little bit about what your experiences were like at places like Freddie Mac, the World Bank, FBR and ProShares. That's such a diverse. Yeah. Set of experiences. What did you take away from that life experience and, and how did that ultimately lead you to launching your own firm?

[Jeff Chang]

Yeah. So I could tell you one of the best things about what the military teaches you is not just teamwork and looking after the people next to you and really making a commitment. But there's also another thing is work ethic. Like I could tell you that I'm a morning person. I didn't grow up a morning person. But it's like 5am I'm up. And the funny thing is my girlfriend's a night person. She's like, how are you, like sprightly at 5:30? And I was like, that is actually learned behavior. Right. So that was like kind of the first thing of learning grit and, and you know, tackling the day early on, making your bed things, those small things in life. I think it had been really, I'd say important and, and you know, kind of keystone in, in that process. The second is actually when I first started my first job at the World bank after trying to start my company, I had to translate energy companies in China. And I had two problems. Number one was I didn't. My Chinese wasn't good enough. And secondly, my accounting wasn't good enough. Hence the CPA came in I was like, at least I got to learn one. And then I cut over to Freddie Mac. And if you remember, during the 2002, 2003 time frame is when Freddie Restatement. So as a certified public accountant, I was extremely sought after at that time. So I worked at Freddie Mac and I realized that I really wanted to. I read Liars Poker by Michael Lewis and I realized that I. Hey, I really wanted to trade mortgages. So I started to.

[Barry Ritholtz]

Which, by the way, he said he is horrified because he thought this was a cautionary tale.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

And all it did was encourage more people to do that.

[Jeff Chang]

Totally, totally. Reading that book really made me want to. You know what he said in the book? Big Swinging. Right. Like everybody. It was just a such a fun story. It almost painted Wall street in a specific way, but it was just the interesting part. And by the way, it also got me into reading Fabozzi about fixed income, about the mortgage market. And then I wanted to be a trader. So, you know, I studied for the CFA exam. I got my CFA charter. I didn't know that would lead me to over a decade of teaching cfa.

[Barry Ritholtz]

Right.

[Jeff Chang]

Really fun to do that and kind of give back. But so trading mortgages, Freddie and then FPR, I got to trade during 2008, I got to have a front row seat to seeing the, you know, Bear Stearns Lehman. You know, I remember trading repo during the 08. September. 08. It's the. The month I lost all my chest hair in one month. But it was, I mean, that's what I thought finance was like. So then later on, I cut over to convertible bonds and options. Then the flash crash hit in 2010, which was, by the way, I'd never seen an entire trading desk stand up within one minute of. Everybody's like, what's going on? So, yeah, I got to see a lot of Wall street in my 20s and 30s. It was definitely a formative time of understanding kind of what made capital markets tick and understanding. And also understanding the pitfalls. The hubris of finance that, well, that

[Barry Ritholtz]

has to be the big takeaway from 0809, is that markets go up and down. And if you're leveraged, it's a problem. And if you're highly leveraged, it's usually pretty fatal.

[Jeff Chang]

Yeah, exactly. And disasters are always clear in hindsight. And you look back and you're looking at 20, 30% default rates. You're like, that would have been so clear in your mind when you started to look at some of the data. And so that was really Formative. And the other component is kind of like what Warren Buffett says, you always know who's not wearing pants when the water goes out.

[Barry Ritholtz]

When the tide goes out.

[Jeff Chang]

Yeah, exactly. And so I always, I'd say think about, hey, if the tide goes out, make sure the, the money we manage for our clients that we got pants on. Right.

[Barry Ritholtz]

Risk management turns out to be more than just a phrase. It's really important if you're running other people's.

[Jeff Chang]

Exactly. And it's something that you live and breathe. And what I actually, you know, a lot of our investment processes to try to get our clients to understand that and utilize kind of a lot of the tools that we build are basically pants. Like, you know, when the water goes out, make sure that, that you have something there because of uncertainty.

[Barry Ritholtz]

That's to say the very least. So, so let's talk a little bit about that. You come out of this experience on a desk through the financial crisis you launch vest in 2012. What was the motivator? What led you to say, hey, I think we could do this better?

[Jeff Chang]

Yeah. So I had a very short stint at ProShares where I met my co founder, Karan Sood. He worked on the structuring desk at, at Barclays. And we talked about like, hey, let's start our own firm. And then our first idea was going to be buffers like downside protection that we saw in the structured note market. And by the way, this actually segued into the mortgage Crisis because in 2008 the largest issuer structured notes was Lehman Brothers. Right. Like you have 100% protected note and then now you're standing in bankruptcy court. So that was a big change in the industry. I think the structured note industry went from 120 billion to 30 billion in that time frame from after the 2008 crisis.

[Barry Ritholtz]

I'll tell you a funny story. I was a market strategist at a brokerage firm in 0203 and we got pitched a downside protected SMA. And I was just sitting in a conference room hearing this pitch. What are the any questions? And I didn't ask the obvious question that I thought which was, well, great, the NASDAQ's down 81%. Where were you five years ago? Who needs this now? But the question I asked and got called into the corporate counsel's office for was, hey, what about counterparty risk? How do we know that you guys are going to be there to make the trade? Good. Sir, Lehman Brothers has been here for 189 years. It'll be here long after you're gone. I'm like, okay. No, it's an actual risk that no one was even discussing. It was just assumed. So it turned out that, you know, counterparty risk is a real. Is a real thing.

[Jeff Chang]

Oh, yeah, it's a very real thing.

[Barry Ritholtz]

So we're going to talk a little more about Vest and Buffer funds in a moment, but I just want to get the timing right and talk a little bit about your experiences at Y Combinator. You launched Vest with your co founder in 2012. You joined Y Combinator in 2015. What led you to saying, hey, let's see if we can hook up with the guys over at Y Combinator.

[Jeff Chang]

Yeah, so that's the thing in finance is there's not too much innovation because it's a lot of regulation and so on and so forth. And so even at our company, we always, even our identity today is still, you know, Silicon Valley meets Wall Street. Right. I always think that, like, in my mind, if, you know, someone in Silicon Valley were to come into our business, they could end up in jail. Right. Or if Wall street ends up in, in Silicon Valley, you know, you might be, you know, just end up in a ditch because, you know, you'll get

[Barry Ritholtz]

run over for sure.

[Jeff Chang]

Yeah, exactly. Because at the end of the day is, you know, we went four years with no income.

[Barry Ritholtz]

Wow.

[Jeff Chang]

Right. Like, lived off our Wall street bonuses. Me and my co founder, Kran sue, like, we didn't get paid for, you know, four plus years to found this company. Like, that's how much you have to. The grit and the belief in something. And that culture, really, really, I think comes out of kind of startup, kind of the Silicon Valley area. Y Combinator at the time run by Paul Graham. Is it Paul Graham at. That was the first year Paul Graham stepped. Then Sam Altman. When I showed up, Gotcha was president of y combinator. So 2015. I know, 2015, yeah. Sam was president Y Combinator for the folks out there that don't know. So yc, you know, similar to like a college application, you, you fill out an online college application, you actually don't need a company. They, they help you form the firm. And you know, the companies that have come out of that program, you know, Airbnb, Reddit, Coinbase, Store, Dash, OpenAI was funded by YC Research. So all of that, all of those firms came out of yc. So in fact, I think I read a book called the Launch Pad, which talks about yc, the companies that they're, I mean, the first class Of YC included Sam Altman, Justin Kahn who founded Twitch, and Alexis o' Hannon who founded Reddit. And I think there was like, correct me, maybe nine companies. I mean that's a all star cast if you ask me for a class. And it was definitely someplace that we wanted to be around. There weren't a lot of finance firms. In fact, Vest is the largest asset manager to merge out of yc. So it was definitely something to try something different and really get into the Silicon Valley and really push the innovation within finance.

[Barry Ritholtz]

I don't know if this is still the case, but a couple of years ago the standard deal was something like half a million dollars for 7% of the company plus a three month program a of building, iterating, pitching, et cetera. Is that more or less sound right?

[Jeff Chang]

That's right. That's the deal today our deal was probably close to 1/5 of that.

[Barry Ritholtz]

Oh really? Yeah, well, 10 years ago. A lot has changed over the last

[Jeff Chang]

decade and they have done a great job. I think they have maintained their. I think the stat was since 2012, 20% of the super unicorns were funded by Y Combinator.

[Barry Ritholtz]

Wow, that's amazing.

[Jeff Chang]

And then like second place is like 3% plus or something like that.

[Barry Ritholtz]

And this is like a full on boot camp where it's three months and they are really taking you through the process. Here's how you build a startup, here's how you iterate. When you first joined yc, did you have any idea what the final product of Vest was going to be or did that experience clarify where you wanted to go?

[Jeff Chang]

There were certain. We went in with the idea of buffers and downside protection. There were certain pivots as far as like hey, what's the best delivery vehicle to start with?

[Barry Ritholtz]

Meaning an ETF as opposed to an SMA or.

[Jeff Chang]

Exactly, exactly. But that was the foundational. If you even look at our application, our pitch, it was exactly talking about the need for downside protection, the need to fix liquidity and credit risk and other types of instruments. Those were kind of the foundational problems because YC always says that like make something that people want and then don't just come up with the ideas, start with the problem.

[Barry Ritholtz]

You're solving for specific problem and the

[Jeff Chang]

problem needs to be painful enough. And so anybody out there that's ever thinking about starting a startup, always start with the problem first and make sure the problem is painful enough for your customer that that becomes, you know, how you solve it, it can change a little bit, but the problem always existed and we thought that that was a noble problem and a painful enough problem to seek.

[Barry Ritholtz]

That's a very customer focused approach to building a business. I don't know if Wall street necessarily thinks in those terms. There tends to be an attitude of this is how it's been, it's been successful. Why do you think you're smarter than everybody else, smarter than the market? Like, that's the sort of pushback you've gotten and that you tend to get when you roll out a different approach. How has the experience been marrying the Wall street ethos where failure is abhorrent and the Silicon Valley mindset, which is, hey, failure just gets you to the solution. It's just one more step.

[Jeff Chang]

And. And that's where kind of the ethos of our Silicon Valley meets Wall street is that we live in both worlds. Like, our background, me and Kuran's are Wall street backgrounds. That, that there is no move fast and break things mentality on our Wall street eos. Right. It is measure four times, cut once. This is people's livelihoods, their. Their wealth. So that part we did not adopt. Not like break things type mentality. That is not.

[Barry Ritholtz]

It's hard to do that when you're a highly regulated industry.

[Jeff Chang]

Exactly, exactly. Second is that we also realized you can't do this alone. It's not like we're starting an Airbnb where we can just kind of do X, Y and Z. We needed partnerships. We needed like coming back to the point of influence. Like, we needed people that really could help us with innovation. Hence, we actually only have two investors. One is Siebel Global Markets Chicago Board Option Exchange, the largest option exchange in the world, and First Trust, one of the largest ETF providers here in the United States that has been intricate in the ability to shape and mold the industry. Just like even with the exchange.

[Barry Ritholtz]

Wait, let me roll you back. You said you only had two investors.

[Jeff Chang]

Now today.

[Barry Ritholtz]

Now today. All right, so before we get there, let's. Let's talk about the. The post Y Combinator experience. So they give you barely six figures for a small chunk of the company. They. They take you through a boot camp that teaches you all these different things, from focus on problem solving to iteration to pitching. Investors who are the early investors Invest.

[Jeff Chang]

So we had our lead coming out of Y Combinator was First Round Capital. People aren't familiar.

[Barry Ritholtz]

That's the great name if you're doing venture investing.

[Jeff Chang]

Exactly. They were one of the first investors in a small company called called Uber.

[Barry Ritholtz]

So that worked out okay. Yeah.

[Jeff Chang]

They got a Lot of big wins there. And after that, you know, we had kind of a party round of a lot of different, like Angels and other, other smaller VCs. But after that, that's when CBO came in and, and wanted a, a bigger stake of the firm. But the whole YC experience was very much like the show Silicon Valley, right,

[Barry Ritholtz]

Which I, which I just loved. So great.

[Jeff Chang]

And to the point where like when we got to yc, we rented a hacker house. By the way, the house that we rented was called Hacker House and it was a one story building with like three bedrooms, not enough bedrooms for all of us that were working there. I think Karan had to sleep on the floor on a mattress for three months. And by the way, this is coming from being over a decade on Wall Street. Like we're now sleeping on the floor,

[Barry Ritholtz]

hey, there's to do, but get this done.

[Jeff Chang]

Exactly. And this is why I say like sometimes, like if a former trader on Wall street ends up in Silicon Valley, they may end up in a ditch because like you have to go four years, no pay, sleep on the floor. It's not fun where you're used to like wearing, you know, suits and loafers on Park Avenue. It's a big shock to the system. But that's the thing is like, you know, at the same time it's okay sleeping on the floor. It's better than sleeping on the ground when, when you're in the military. But that, that's the grit that you kind of go through, right?

[Barry Ritholtz]

Coming up, we continue our conversation with Jeff Chang, co founder and president of Vest, talking about his experiences at Y Combinator. I'm Barry Ritholtz. You're listening to Masters of Business on Bloomberg Radio.

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[David Gura]

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Foreign

[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Jeff Chang. He is the co founder and president of Vest. The firm manages $50 billion in ETFs that are described as outcome oriented investing. Some people call them buffer funds. So you have this experience with Y Combinator, any of that graduating class with you? You're still in touch with who else were.

[Jeff Chang]

Yeah. So I'm not sure. Folks out there know GitLab. Oh, of course, Sid was our group.

[Barry Ritholtz]

No relationship to GitHub, which predates that

[Jeff Chang]

by a long time. But yeah, but GitLab was our I think they IPO'd on the NASDAQ. I think over 5 billion or something like that. They're doing really well. There was equipment Share was also our batch. A lot of big winners in our. And by the way, you've probably been to college where you go into a lecture hall, right, and you have your first day of class, the first day of yc. You know what they tell you? They're like, you know, 4% of you guys in this room will be billionaires.

[Barry Ritholtz]

You know, no intimidation factor, by the way.

[Jeff Chang]

That's the math. Right? On average it's a 4% I think right now like 5 to 6% unicorn rate. But how many classes can you go through that? Like you're like, hey, 4% of 4 to 5% of you guys are going to have extremely successful companies coming out of this class. And by the way you look around, you're like, oh man, is that really possible? And then you blink. Thirteen years later you're like, wow, it really did happen. Like there's incredibly successful firms and incredibly successful people when you look back. And like even then, now I look at My group partners, I look back, my group partners were incredible. I had Gary Tan, who founded Initialize and also is now the present CEO. Y Combinator. Alexis o' Hannon founded Reddit. Justin Kahn founded Twitch. Kat Melanac, who was like an all star in marketing and pr. Like I had an all star group. Yeah.

[Barry Ritholtz]

No, it definitely sounds like it. We're talking about winners, but Silicon Valley. Whereas losers, like a badge of pride.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

Like it's, hey, this is what's expected. Which is very different than the way the east coast tends to approach things. Tell us about that. Not being afraid to fail, not being afraid to try things, iterate and take this doesn't work. Let's go with that. How different is that experience on the west coast than what you experience on Wall Street?

[Jeff Chang]

Yeah, I mean, definitely in Silicon Valley, failure is, is okay. They have a saying, if you're going to fail, fail fast. Right. Whereas I feel like on Wall street it's like you don't want to fail fast. Like that's called a blow up. Right. So there's some parts, given the industry that we're in, we had to ignore some of the aspects of it. I think everything that we did, I wouldn't say was ultimate fail, the success that we wanted, because we wanted to make sure everything we built were strong and foundation. Right. It would like, last stand the test of time, no matter what happened. Maybe not wildly successful, but then that, that's how you pivot. So it's not necessarily failure per se, but not the success you're looking for. Then pivot and try to find other ways to deliver and how to solve the problem better. But I, I still think that the idea of, of not being afraid of failure and that grit and the ability to, you know, pick yourself up, it's that attitude that, like, you know, this is not the end. Failure is just the, the mother of success. And you just have to keep learning from those mistakes because everything is a learning process. I can't tell you one person that I know that's successful that has not failed.

[Barry Ritholtz]

No, that makes perfect sense. You know, you, you don't know what's going to work and you don't know what's not going to work until you try.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

And if, you know, there's a story about, hey, if you're not failing occasionally, then you're just not taking enough risk.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

Say, to say the very least. All right, so. So let's talk a little bit about how this developed. You come out of Y Combinator sometime in 2015. When did you first start taking client assets? Client money?

[Jeff Chang]

Well, nyc, we were taking client assets. I think we launched our first mutual fund in 2016. It was the first buffer fund of its kind. And then.

[Barry Ritholtz]

So wait, let's stay with mutual funds which have their own complications with capital gains tax. Given what you do primarily with derivatives and options in order to create that buffer. How does that play out in a mutual fund wrapped up?

[Jeff Chang]

Yeah, there are obviously challenges that may not be as, well, let's say the same as like an ETF that, you know, in 2019 they introduced the in kind. This is also another example of the partnership with cbo.

[Barry Ritholtz]

It's been around for real estate for forever, it seems.

[Jeff Chang]

That's right.

[Barry Ritholtz]

And it just took Wall Street a while to catch up to that. Explain what in clown, in kind creation and redemption looks like, what it means to you.

[Jeff Chang]

So in mutual funds there's a challenge in some cases that if there's a redemption, you would sell your securities which could have the potential to realize gains in ETFs. Not just unique to these ETFs or all ETFs, they have the ability to, let's say in kind security. So when someone wants their money back, instead of giving the market maker selling securities and giving them cash, it's in some cases you can give them securities, thereby not potentially realizing the gain for the shareholders. So it has the potential for tax efficiency by having in kind. Now, prior to 2019, October of 2019, that was not. We weren't able to do that with options. That was introduced in October 2019. So we launched our first buffer ETFs in November of 2019 in partnership with our partners at First Trust. And so that has been one of the fastest growing areas, not just for our firm, but as the ETF industry as a whole.

[Barry Ritholtz]

So, so let's talk a little bit about what a buffer fund does. What are the advantages? What are you giving up in order to obtain those vantages? What's the largest fund? What's the largest ETF now at Vest?

[Jeff Chang]

So the largest buffer fund and the one at Vest is bufr. And it's. Yeah, it's built on the foundation that, you know, the, the kind of fundamentals of the strategy is the buffer strategy, which is, you know, let's say you get S and p exposure for one year, the first 10% is protected. So as an example strategy, if S and p is down 10, you're flat for the year and then you get upside up to, let's say, a predetermined Cap, let's say S and p is up 15, you're up 15, but the most you can make is 15. So if S&P is up 16, you're up 15. Right. So you're capped out at that 15.

[Barry Ritholtz]

So years like 23 and 24, kind of unusual, you don't usually see 25% two years in a row. But if you were in the fund in 22, down 22% means you're only down 12%. That's right.

[Jeff Chang]

That's right.

[Barry Ritholtz]

So that's the trade off.

[Jeff Chang]

Yeah. And here's the thing is that most people don't realize these strategies have the potential to outperform the market, even if you're talking about, you know, high double digit equity returns. Because think about this. In 2022, because of inflation, when interest rates went up, stocks and bonds both went down at the same time, right. You could have mixed your stocks and bonds any way you wanted in 2022.

[Barry Ritholtz]

60, 40 was negative in 2020.

[Jeff Chang]

And unless you were managing money 40 years ago, you had not experienced inflation. Right. And you couldn't hide anywhere. I mean, you were like Tom Brady, choosing between alimony and child support while taking your kids to jiu jitsu practice. The thing is, there was nowhere to hide, right? Whereas if you were hedging, and the great thing about hedging is if you buy S and P and you buy an S and P put, that put is perfectly negatively correlated to S and

[Barry Ritholtz]

P. It's an inverse, it's the opposite.

[Jeff Chang]

And so imagine if you had a strategy that did not participate in the majority of the drawdowns in 2022, that means you had more to invest to take advantage of the gains in 2023, 2024 and 2025. This is the compounding effect of winning without losing, right? It's the compounding effect of playing offense and defense at the same time. Because the end of the day is a lot of times, you know, these types of strategies are not the get rich game. If you're 20 years old, probably not the strategy for you. But you know, in, in, in our industry, a lot of the people that have wealth, they're in the stay rich game game, right? These types of strategies are in the stay rich game because if, if you have wealth, you just don't want to be poor, right? So that's why, that's the kind of crux of protecting your, your equity exposure. And the, the idea is, the issue with hedging has always been that to hedge with options and so on. And so Forth one of the biggest, and they had surveys on why, you know, investors and financial advisors don't hedge with options. And they all, everybody said the same two things, things, compliance and scalability. You know, the compliance burden associated with trading options and scalability. Because when you buy a fund, you buy a stock you, you could put in your portfolio, fall asleep for 30 years, maybe you bounce, rebalance once a quarter. You buy an option every 30 days, 60 days from now, you have to trade it by having it inside a fund. We can trade that for you. And so now you can ask it allocate, rebalance once a quarter. It solves a lot of those issues. And, and this is the, the, the thing that I find very interesting is two things. Number one is these strategies have been around for over 30 years. The buffer structure note has been around for years. Buffer annuities, I think were introduced in 2010. All we did was cut the bank and insurance company out. Like instead of having the banker insurance company hedge themselves with options and then issue you a policy or issue you a note, we just said, why not just put the hedge in a fund and now you own it. We cut the middleman out of the middle. The other component is to think about in business that I, I always look back. So Richard Thaler, the professor at University of Chicago, won the Nobel Prize for behavioral finance, right.

[Barry Ritholtz]

Essentially created the field.

[Jeff Chang]

Yeah, the nudge. And I believe one of the studies by Cornell University had this study of, I think they had kids in the lunch line, they gave them free apples. Like, you get the end of that, you get a free apple. Right. By the way, the consumption was like less than like, I don't know, 20%. Like it was a very low consumption rate. No one took the apple. Then they cut the apples up and they put them in little bags. By the way, the consumption went through the roof. Why? This was the nudge. This was the idea that you make it simple, people will use it, think about options as apples. And then that we had bagged those apples to make it easier for the user to consume them without the compliance and scalability burden to them. Because theoretically any broker or any financial advisor out there can actually trade those themselves. But that's like the same thing. Like every child could sit there and cut their own, slice their own apples, but they don't want to do that.

[Barry Ritholtz]

So let me ask you, because you've brought this up a few times and I want to hone in on this. Is your target consumer mom and pop Main street investors, or are you focused more on the advisor channel or brokerage channel or all three, some combination.

[Jeff Chang]

We are not that focused in the retail space mostly and by the way, I would say 100% of our focus is in financial professionals. Really because those are our partners. Those are the people that we stand side by side with. We build products. Those are the people we're solving problems for them which they're solving problems for their clients. We stand side by side with the financial professionals that manage, you know, the.

[Barry Ritholtz]

And once you bring them up to speed, it's, it's incumbent on them to find the clients that think are the right fit for this. And they get to explain that.

[Sonesta Advertiser]

Exactly.

[Jeff Chang]

Because every single client is different and unique. We make products across and every client is different and how that that gets utilized. We, we help the financial advisor, even you know how to best build and achieve their clients investment objectives. But as far as like the end client, that that's typically not, not our customer.

[Barry Ritholtz]

So. So I mentioned 6040 earlier. Does a buffered fund act as a substitute for a 60 40? In other words, if you own whether it's 60, 40, 70, 30, you own bonds for income of which there hasn't been a lot over the past 15, 20 years. But also as a non correlated asset with Equity other than 81 and 2022 does this and it offsets the volatility and drawdowns in equities. Do buffered funds behave similarly to a 60 40? Is that the thinking?

[Jeff Chang]

I wouldn't say similarly. Let me give you kind of a how we think about it. So if you look at let's say a strategy of a 10% buffer on S and P. In fact there are indexes out there that attract these. If you compare that to let's say like a BlackRock 6040 portfolio, you actually notice the standard deviation is almost identical. The volatility is very similar. Right. Over the long term, but the source of the risk management is different. Right. You're actually hedging, you're not hoping that the correlation between stocks and bonds, the negative correlation is there that you know, when my stocks go down, I hope my bonds go up kind of situation. Right.

[Barry Ritholtz]

Well historically they do most of the time. They didn't in 2022, they didn't in 1981.

[Jeff Chang]

Exactly.

[Barry Ritholtz]

You know, so it's every 40 years or so we seem to get this

[Jeff Chang]

with inflation at 3%. What happens if inflation rears its head

[Barry Ritholtz]

again the next rising?

[Jeff Chang]

Exactly.

[Barry Ritholtz]

You'll end up with the same issue the next time we see a serious set rate hike.

[Jeff Chang]

Exactly. This is why? We say why not diversify your risk management and hedge? So if I have a hundred dollar portfolio portfolio, and let's say I have $60 in equity, $40 in fixed income, and let's just say I take 10 bucks out, I put six, take six from equity, four from fixed income, I put it into, let's say a 10% buffer strategy in S and P. Perhaps the standard deviation of the portfolio could be very, very similar. But notice the source of your risk management has changed. You've introduced hedging as the source of your risk management without the compliance, without the trading scalability issues of options. You've introduced hedging as the source of risk management if inflation were to rear its head. Because the thing is, this is what everybody needs to ask themselves. If inflation were to come back. Right. Which is a very is not a, is very.

[Barry Ritholtz]

There's a non zero possibility way above that.

[Jeff Chang]

Yeah, exactly. What in your portfolio is going to save you if 2022 repeats itself? That's the question everybody needs to ask. I always get the answer. Commodities, Great commodities. It's a timing trade, right? You can get in, it'll work. But when it's not inflationary, what happens to that trade? I mean, I'm, let me point out

[Barry Ritholtz]

that gold didn't do great in 21 or 22. It's only in the past few years where it's really exploded higher.

[Jeff Chang]

That's right, that's right. So I'm not smart enough to time that trade. And that's the great thing about these types of solutions is you don't have to time the trade, right? Like you're diversifying your risk management through just hedging. And like I said, repeat it again, this is the stay rich game, right? How do we protect wealth? Not, not like make exorbitant amounts of it, but protect wealth and get a decent return from, from people's wealth.

[Barry Ritholtz]

So buffer is 10% hedged on the S&P 500. Tell us about some of the other ETFs you guys run.

[Jeff Chang]

So one of the kind of overall themes that we've seen in the market is, you know, two things that really people are looking for is downside protection. But the other one is income generation. As the boomers are in retirement, the need for yield has really shown how high it is. I mean, if you look at the derivative income space, I think in 2018 and Morningstar is ranked 58th, last year is ranked 9th. Inflows, right. People are looking for income. And as volatility goes up, just like Strategies like writing cover calls are extremely. It's another way to derive yield by monetizing volatility in different asset classes. You could do it in gold, you can do it in bitcoin, you can do it in equities, you can do it in fixed income. And that's the thing is people were always thinking one dimensionally that like the innovation is always about thinking three dimensionally when everybody else is thinking in two dimensional. Mentioned. Right. This is why we have, you know, build strategies to derive income from, you know, not just equities, but fixed income, but for. From gold, from bitcoin, from any asset class you can.

[Barry Ritholtz]

So give us a few ETFs that are primarily income focused.

[Jeff Chang]

Yeah. So one of our biggest ones is K and G, which tracks the dividend Aristocrats. Rdvi, which tracks the dividend achievers. These all provide, you know, attractive level of yield, I think.

[Barry Ritholtz]

So dividend aristocrats tend to be high dividend, low price, they tend not to be high PE companies. So they're fairly stable. Is that. Yeah.

[Jeff Chang]

So the companies that have grown their dividend, this is created by S and p back in 2005. Companies that grown their dividend for 25 consecutive years. Wow. And these are dividend growers. They're not dividend payers. Payers. So they typically, I believe, you know, Yield less than 2%, but they've grown their dividend for 25 consecutive years. So for a company to grow their dividend for 25 consecutive years, that's a stable business. Yes. And it has to cash flow. It's not a PE play. Right. For all intents and purposes, it is companies that have to have strong moats. And the other thing that people miss is good corporate governance. Because who makes dividend policy? The board. Board. For a board to never cut a dividend for 25 years, it actually was a filter for good corporate governance.

[Barry Ritholtz]

Now, and that stock symbol is.

[Jeff Chang]

That ETF symbol is kng.

[Barry Ritholtz]

K ng.

[Jeff Chang]

Yeah. And.

[Barry Ritholtz]

And you guys generate additional income on that with covered call writing.

[Jeff Chang]

That's right.

[Barry Ritholtz]

So if it's a 2% yield, what do you actually.

[Jeff Chang]

So our distribution yields probably in the past year over 8%.

[Apple Card Advertiser]

Really?

[Barry Ritholtz]

That's a big number.

[Jeff Chang]

And we're on average, I believe, covering around 20% of every single name. So, you know, If I have 100 shares of Walmart, I'm writing an at the money call on let's say 20 of those shares as an example to achieve that target income. So one of the things that core beliefs that we have when Writing cover calls is like one of the biggest drivers is stock selection. You pick good stocks, you get good results. Right. While you know the Aristocrats, they don't have the high flying Mag 7 names.

[Barry Ritholtz]

Right.

[Jeff Chang]

But definitely as you look forward into the windshield, these are really going to be the names as the market bronze out. Right. Like I really do think in the next year you're really looking at kind of a barbell approach where you, yeah, you have the Nvidias and the, and the high hyperscalers in your portfolio but you really need to have the strong staples that cash flow.

[Barry Ritholtz]

What are some of the names in kng?

[Jeff Chang]

Well you got like Chevron, Walmart, like you're really blue chip names that are there. I mean look at Chevron, they, they have the potential to be, you know, one of the beneficiaries of oil in Venezuela. Right. Like they were, they were there before. And these are the cash flowing like crime, like companies that like, like said growing their dividend for 25 consecutive years. These are strong, strong names that are out there.

[Barry Ritholtz]

Do, do you do anything with fixed income on the yield side as well?

[Jeff Chang]

Yeah. So we have cover calls on high yield tracking. HYG gives you also I believe a double digit distribution yield only covering about you know, 20 to 25% of the portfolio. So you're still getting over, you know, on a weekly basis. 70.

[Barry Ritholtz]

And what's that ETF symbol?

[Jeff Chang]

H Y T I Heidi. Yeah.

[Barry Ritholtz]

And, and what about come up, do you do anything on the commodity?

[Jeff Chang]

So we have gold I igld. So you know, biggest knock on gold has been that hunk of metal sits in your portfolio, doesn't do anything. Now you can monetize the volatility and have you know, potentially same process covered.

[Barry Ritholtz]

Coal writing.

[Jeff Chang]

Exactly.

[Barry Ritholtz]

So it, this is why CBOE is a partner with you guys. How does that relationship help you manage all of this option writing all this?

[Jeff Chang]

That's a great question. So let's take iGold as an example. Right prior to that fun GLD options stopped trading at 4 o'. Clock. By the way, this is one of the reasons why CBOE partnered with us is how do we solve certain issues in the option market for the construction of, of of funds. Right. If options stop trading at 4 o' clock and I need to know the close, I can't create an ETF on that. Right. S P options, spy options, they trade, they close at 415 today. GLD options stop trading at 415. By the way, that's a really cool statement to say that the Entire street trades GLD options that extra 15 minutes because we wanted that, that's great.

[Barry Ritholtz]

But that's because you have, you have to take the closing price at 4 and then use it for, and we

[Jeff Chang]

need that, we need that option market to be open that extra 15 minutes. And by the way, that, that those products by First Trust Invest are, are the reason why we have an extra 15 minutes to trade GLD options. So if you're, you're late and you're trading at 405, that, that's us.

[Barry Ritholtz]

And, and option trading is so much more complicated, so much more difficult. Like you, I started on an equity desk but have always been a little bit of a, an option junkie because it's so fascinating and most people use, don't use options correctly. They're just making like a lottery ticket bet, which tends not to be smart. You guys are using options for a very specific purpose to achieve what you describe as a defined action outcome.

[Jeff Chang]

Solving a problem.

[Barry Ritholtz]

Solving a problem. Really interesting.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

Coming up, we continue our conversation with Jeff Chang, co founder and president of vest. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

[David Gura]

The news doesn't stop on the weekends.

[Lisa Mateo]

Context changes constantly and now Bloomberg is the place to stay on top of it all.

[David Gura]

Hi, I'm David Gura. Join us every Saturday and Sunday for the new Bloomberg this weekend.

[Christina Raffini]

I'm Christina Raffini. We'll bring you the latest headlines in depth analysis and big interviews, all the stories that hit home on your days off.

[Lisa Mateo]

And I'm Lisa Mateo. Watch and listen to Bloomberg this weekend for thoughts, thoughtful, enlightening conversations about business, lifestyle, people and culture.

[David Gura]

On Saturday mornings, we put the past week's events into context, examining what happened in the markets and the world.

[Christina Raffini]

Then on Sundays, we speak with journalists, columnists and key political figures to prepare you for the week ahead.

[Lisa Mateo]

Join us as soon as you wake up and bring us with you wherever your weekend plans take you.

[David Gura]

Watch us on Bloomberg Television, listen on Bloomberg Radio, stream the show live on the Bloomberg Bloomberg Business app, or listen

[Christina Raffini]

to the podcast that's Bloomberg this weekend. Saturdays and Sundays starting at 7am Eastern.

[Lisa Mateo]

Make us part of your weekend routine on Bloomberg Television Radio and wherever you get your podcasts.

[Barry Ritholtz]

I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Jeff Chang. He's president, president and co founder of Vest. The firm specializes in outcome oriented investing via primarily ETFs. They run over $50 billion in assets. Before I get to my favorite questions, I want to ask any. So we've covered stocks, bonds, commodities. You mentioned crypto. What are you doing in terms of crypto? And generating additional defined outcome results using derivatives.

[Jeff Chang]

Yeah. So we have a strategy also. Target income, almost, I believe about 18, 19% yield. And you're still only covering about 20%. So that strategy tracks Bitcoin. So you can get on a weekly basis, let's say, you know, 70, 80% of the upside in Bitcoin and then a really high, almost 20% yield by monetizing the volatility. It's the same thing because, like, just like gold, some of the knock is, is that it just sits in my portfolio, doesn't do anything. And the value, well, no one could

[Barry Ritholtz]

say that about Bitcoin. It's always doing something, either going up or going down.

[Jeff Chang]

Yeah, exactly.

[Barry Ritholtz]

And what's the ETF symbol for that?

[Jeff Chang]

Ibit. I'm sorry, not I. That's BlackRock. Yeah, yeah. DeFi. DFII. That's right.

[Barry Ritholtz]

D F, I, I. And so that's options. How much of the upside, how much of the downside do you get and give up? Or is it just geared?

[Jeff Chang]

We're just writing cover calls on to target, you know, a specific yield. Like I said, I think anywhere from recovering every week, about 20 to 25% at the money.

[Barry Ritholtz]

How often do those roll?

[Jeff Chang]

Every week.

[Barry Ritholtz]

Every week?

[Jeff Chang]

Every Friday. Yeah. The reason why we like weeklies is that when you sell a call, you want the premium to go to zero, right?

[Barry Ritholtz]

That's right.

[Jeff Chang]

And that decay accelerates in that last week. If you're selling monthly options. So if you, like, do it four times a month, you have the potential to generate more yield because you're always capturing that extra decay. It's like football tickets, right? Like, you ever go on StubHub, like game times at 1 o' clock and you go on StubHub at 12, the ticket starts to drop like a rock. Imagine if you kept tracking that and you made money off that drop, right? And everything, everything kind of follows that. In fact, there's actually only one thing that doesn't follow that. You know what that is?

[Barry Ritholtz]

Go on.

[Jeff Chang]

Giants tickets, they decay before the season starts.

[Barry Ritholtz]

Well, as a guy who used to be in New Jersey for sure, or

[Jeff Chang]

jets tickets, actually, both of those is an anomaly.

[Barry Ritholtz]

So really. So in other words, bad assets don't generate good option returns. That's pretty reasonable. How often do things get called away? That's obviously the risk.

[Jeff Chang]

Risk.

[Barry Ritholtz]

When you're writing calls how do you manage around that? How frequently is that built into your models?

[Jeff Chang]

I mean that can happen pretty frequently. But here's the deal. Like, like think about this. And this is just a concept of, of let's say I collect a two dollar premium and the stock goes up one dollar.

[Barry Ritholtz]

You're good.

[Jeff Chang]

Yeah, I made a dollar, but it still got called away. But I still made a dollar. I just buy the stock back or however way I deal with the assignment, depending on the strategy. So the idea is as long as the stock doesn't go above the premium, if I'm writing out the money or what I've actually it gives you a

[Barry Ritholtz]

buffer to repurchase stock. Not at a loss.

[Jeff Chang]

Exactly. And this comes into what we call about the implied versus realized premium, meaning options. If I look historically of a particular asset, whether it be a stock or a commodity or whatever, and historically move gives X, I'm not going to sell the premium at that number.

[Barry Ritholtz]

Right.

[Jeff Chang]

It's got a plus. Right. Just like when you sell car insurance. Like if my expected loss is a thousand dollars, I'm not going to sell the premium at 4000. I'm going to sell it for $1200 to make 200. Right. That extra little bit.

[Barry Ritholtz]

Right.

[Jeff Chang]

So in options they have what's called the implied versus realized premium. And so that's really kind of where you're trying to capture is, is the implied volatility versus what? The realized volatility. And you're hoping that the implied will be greater than the realized. I mean that's the hope and option, especially when you're selling them. All right. I think there's a stat that like, you know, 60 or 70% of the time the person selling the option wins the trade. Right, Right.

[Barry Ritholtz]

Most, you know, old option traders don't die, they just expire. Worthless.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

Is the old desk joke. But you know, if you're a writer of options, you're making a very specific, specific bet.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

And if you're a purchase of options, you're making a very different bet.

[Jeff Chang]

Yeah, yeah. I mean you see this, you know, in some cases of buying options, like you said it, it can, you know, even Warren Buffett said there could be weapons of mass destruction. I mean you can see these zero day options that people are buying that's become crazy. I mean those are like scratch off lottery tickets. Right, Right. Who's buying them? I don't know. The kid and his mom, basement, popping his pimples, eating sandwiches. I don't know.

[Barry Ritholtz]

At one point in time I imagine that There were market makers that had a head hedge that for reasons that were complicated, they were stuck with overnight positions. Like I almost understand that. But the day traders playing with these, this is fan duels and draftking. Pure speculative nonsense.

[Jeff Chang]

Yeah, exactly. So that's why we don't have anything in that space. But it is something to look at from afar.

[Barry Ritholtz]

Really, really fascinating stuff. Last question before I jump to my favorite questions. So you're constantly thinking about how do we hedge this position? How do we create a buffer? How do we define a specific outcome for clients? What do you think the average investor isn't thinking about relative to that approach, but perhaps should be? What do you think most people are kind of missing or not paying enough attention to? And it could be a geography, it could be a policy, whatever, but you're obviously thinking about a lot of things differently than the typical index purchaser. What are we missing?

[Jeff Chang]

Yeah, I think, you know, while we've had a tremendous amount of growth and in kind of the options base of downside protection and the income generation part, I think a lot of the market is still, I think, thinking two dimensionally in stocks and bonds. Right. Like instead of just diversifying across, think about, you could still diversify but think about other ways to shape your return. Right. Or thinking about income generation out of the equity portfolio. Think about income generation or boosting yield in your fixed income part of it. And then also thinking about risk management beyond diversification there. While there is a lot of good part of the financial professional space that is picking up on this, I still don't think like we're just tip of the iceberg at this point. Right. That's on one, one standpoint, I think people are still missing. The second, I think is that I think one of the biggest drivers of the market today, and no one would disagree, is AI. Right, sure. However, that's not the part that people are missing that, you know, having been through the 2000s, I really feel like this is like 1999, 2000. Like think about the stocks that were big then. Right?

[Barry Ritholtz]

Like you had Juniper Networks, Metromedia Fiber. Right.

[Jeff Chang]

Like I remember you guys remember Priceline, Global Crossing.

[Sonesta Advertiser]

Yeah.

[Barry Ritholtz]

You know, a lot of these companies have been either absorbed into other companies and still Priceline, Expedia, there's a through line there.

[Jeff Chang]

Totally.

[Barry Ritholtz]

How is pets.com not checking chewy today? So some of them were just a little early.

[Jeff Chang]

Exactly. So now let me ask you, who won that trade? Facebook, Google, Amazon, Amazon, Apple, Microsoft. A lot of those companies were private or startups then Google. Right. Yeah, Think about that. And I think that's the same, like history doesn't repeat itself. It rhymes. I actually think a lot of the kind of the hugely successful companies from AI are in startup mode. They're at Y Combinator. 90% of the, almost 80. 90% of the companies at YC are AI driven. They have, I've seen an article recently, their month over month average for the batch is double digits, meaning their revenue is growing over 10% month, month to month, or in some cases week over week.

[Barry Ritholtz]

That's unbelievable. I said, someone the other day, someone said, who's going to dethrone Nvidia? And I said, the founder of that company hasn't graduated high school yet, but he's coming or she's coming.

[Jeff Chang]

He's not.

[Barry Ritholtz]

It's not impossible. All right, let's, let's jump to our favorite questions that we ask all of our guests, starting with who are your mentors who helped shape your career?

[Jeff Chang]

Oh, that's a great question. I would actually have to say my brother.

[Barry Ritholtz]

Really?

[Jeff Chang]

Really? Yes. And in what way? My, I have an older brother, he's four years older than me. He's the overachiever. I'm the underachiever of the film.

[Barry Ritholtz]

Okay.

[Jeff Chang]

So my brother, I remember growing up, he was like the, he was good at math and science. I would literally show up to class and they'd be like, oh, you're Bill Chang's brother. You must be smart. By the way, you know what that does to you as like a lot of pressure. Yeah, a lot of pressure. Pressure. So he went on, he worked at Apple and then was at Tesla. I think he was chief architect of the Dojo Dojo project. Folks that aren't familiar with Dojo, it's the AI system at Tesla that coded the self driving. Right. He recently, in fact, Bloomberg wrote an article about his firm Density AI that I think they are one of the first companies to really kind of take on because the Dojo, I think system is one of the more efficient ways that can take on Nvidia for the chip. So that's why it's funny that you said like, hey, the person that's going to dethrone Nvidia may still be in high school. I was like, yeah, he might just be four years old, right.

[Barry Ritholtz]

Or he could be deep into the process.

[Jeff Chang]

Over. Ready? Yeah. So they recently, like I said, like Bloomberg just wrote an article about them on Density AI and he, he has been extremely. Like a lot of times people ask like, hey, did you work that hard because your parents Were, you know, like tiger parents. No, actually I was just chasing my brother the whole time. It was definitely a different dynamic. And yeah, I couldn't be more proud of him. And a lot of times people are like, hey, what. What tea are the Changs drinking? Because we're. But we get along great while we're competitive. We. We support each other. But he's been.

[Barry Ritholtz]

You're in different fields, so the competition stops.

[Jeff Chang]

He's in engineering, I'm in financial engineering. Yeah, yeah, exactly.

[Barry Ritholtz]

So similar, similar background. Let's talk about books. What are some of your favorites? What are you reading right now?

[Jeff Chang]

I said Liars Poker was very influential one. Yeah.

[Barry Ritholtz]

Just had its 30th anniversary, I think last year.

[Jeff Chang]

I like, I thought was really good for me was the book Influence by Robert Cialdani.

[Barry Ritholtz]

Fantastic.

[Jeff Chang]

It was a great book. Kind of along with that, how to win friends and influence people. I think those are great. I actually in finance, one of my first ones was the Intelligent Investor by Ben Graham. Yeah, Ben Graham. Those are kind of cornerstones. Yeah.

[Barry Ritholtz]

That's a great list.

[Jeff Chang]

Yeah.

[Barry Ritholtz]

I know you are on planes a lot when you're not reading. What are you streaming? What's keeping you entertained on these long cross country flights? Either podcasts or Netflix or whatever.

[Jeff Chang]

I do listen to podcasts. A master's in business. However, there's a new thing that I've been doing. Actually it's not a book. All right. And it'll probably be hit everybody differently on. On what I'm doing here.

[Barry Ritholtz]

Okay.

[Jeff Chang]

And I could tell you I got this from a good friend of mine and he's gonna kill me for saying this, so I'm good. A friend of mine, his name is Matt Bellamy, he's a lead singer in A Muse. Okay. And he, he actually taught me this, so I can't take credit for this. We go into Chachi, but GPT. And he actually sent me the prompt and we prompt, chat. GPT. Tell me in the last two weeks what you have learned that is beyond human comprehension. Something along those lines.

[Barry Ritholtz]

How fascinating.

[Jeff Chang]

And by the way, it spits out all this stuff because if you think about it, humans, like we as a human, you could get a PhD in biology, you get a PhD in astrophysicists, you get PhD in chemistry. But like, like you're the expert in their field. But think about this. That like chat. GBT passed the bar exam in like, I don't know, like a couple weeks. Right. So it's becoming experts in everything and then it's combining all of those Things together. So how many like PhDs and chemistry Astrophysicists do you have that like have like the expert and everything? And then what comes out, like, you tend to learn so many things that like, by the way it turns into this rabbit hole. And I noticed that my prompt actually, because I always tell it to me like explain it to me like I'm sitting 16. So I've been driving into this other thing of. It's been. Teach me about quantum entanglement. Are you familiar with this?

[Barry Ritholtz]

Of course. Who isn't familiar with spooky action at a distance? I mean they teach that in middle school.

[Jeff Chang]

Yeah, exactly. So the, the quantum entanglement of that you have two protons that you know if you do one to X, Y will do the same. It's just like having two dice. If dice on Earth. By the way, they've proven this. Like if you're roll the dice on Earth, it rolls a six. It'll definitely roll a six. And it's not bound by space and time. So basically it could be light years away. You roll that dice, it rolls an 8. This one in Earth is going to roll an 8. And so then they sort of combine that with. Is that part of human consciousness. That is your consciousness quantum entangled is what makes you you, by the way, this type of like thinking there's.

[Barry Ritholtz]

There's a related topic and I have it run on this chat GPT, but I should. Which is the concept of emergence intelligence. Emergence as the natural outcome of the universe. Why does the universe exist if not to create a conscience Intelligence, although the flip side of that is life is fairly common throughout the universe. Hydrogen, carbon, oxygen, nitrogen. But advanced technological life, so far at least appears to be exceedingly rare. So that's the counterbalance of emergence.

[Jeff Chang]

Totally. And then the other thing that I found recently that people can dig into, I think this is fascinating, is that your head experiences time different than your feet from the proximity of gravities.

[Barry Ritholtz]

Well, certainly we have to adjust GPS for the relativity.

[Jeff Chang]

The gps.

[Barry Ritholtz]

Which Einstein turned out to be right about.

[Jeff Chang]

Exactly.

[Barry Ritholtz]

So but the difference between your head and feet.

[Jeff Chang]

Oh yes.

[Barry Ritholtz]

Is so tiny. Unless you're falling into a black hole. And then spaghettification is. Is the problem.

[Jeff Chang]

Yeah. So then you take quantum entanglement and you then say, okay, if I have a proton here and a proton elsewhere and the light in the. How that proton experiences time through entanglement versus how time bends with gravity, by the way, all of this just keeps going deeper and deeper and deeper. And then, and then the thing is That I keep telling it to explain it to me. Like I'm 16 now. My entire prom explains everything. I will explain it to you as if you're 16 years old.

[Barry Ritholtz]

So the, the issue I occasionally run into with perplexity or. Or Chachi PT is is it tends to conform its output to you. And sometimes I'll ask a question and it's like, no, I don't want a list of 10 podcast questions. I just tell me about Jeff Chang and what led to vest. Don't give me a podcast. I have my own questions.

[Jeff Chang]

That's why I use multiple grok everything else. That way I get a whole plethora. And then what ends up happening is you get all this new stuff and then you dig deep into whatever topic. And I found that so fascinating because I just. It's curiosity.

[Barry Ritholtz]

It's like if you're interested in these sorts of things. Absolutely.

[Jeff Chang]

And, and.

[Barry Ritholtz]

But you have to be on guard for the occasional hallucination. And every now and then I find myself leaving AI to go to just traditional search and say, hey, show me a source for this. Is. Is this. Yeah, I don't think before AI, I don't think people were skeptical enough about the sources of what they consumed. With AI, you really have to know what is real and what is fake. People miss that. All right, our final two questions. What sort of advice would you give to a recent college grad interested in a career in asset management or ETFs specifically?

[Jeff Chang]

Yeah, I think a recent college grad, I think similar to kind of bringing it full circle, same thing, thing. Like develop the skills that, you know you're not beholden to anybody, right? Whatever that is, whether you're in college or out of college, like, develop those skills that you can actually, that they're portable one to the other, and then not be afraid of failure. Take chances. Now, this is not for everybody, I would say, you know, meaning not everybody is going to be a founder. Founder. Not everybody's going to be an entrepreneur, which I, by the way, I find as two different people, founder has the creativity. An entrepreneur has the grit and influence. A founder has to have the creativity. Because you're, you're actually introducing a whole new industry or a whole new thing that somebody else has not seen yet. Right, but that's the thing. And then also keep your eye out for painful problems that you have the skill set to solve. So attached, obtain those skill sets and then have your eyes out, eyes peeled throughout life. Write them down, look for pain points, look for pain points, look for problems. And then the second, the last thing is just a personal thing, is don't take yourself too seriously, right? Have fun with life. And I think that is because otherwise all this stuff can create massive amounts of burnout.

[Barry Ritholtz]

And our final question, what do you know about the world of buffered funds? Investing ETFs today might have been helpful 15, 20 years ago, when you were first getting started,

[Jeff Chang]

how hard it would have been, right?

[Barry Ritholtz]

Like, literally, would that have discouraged you from launching or.

[Jeff Chang]

I think that was actually the superpower, right? Like when you climb a mountain and you don't know how high it is and there's a cloud base, if you saw in a clear view, it probably wouldn't be. If you told me, me to quit my job and I wouldn't get paid for four plus years, I probably wouldn't have done that. But then it's like always, success is always around the corner. At least you dream of it, right? Everybody sees what you are now. They don't see the pain where you're constantly just waiting for that cloud to clear on the next part of the mountain. Because I, I could tell you this, that like, if, if, if you saw that, how big the mountain is, it would be. Nobody would do it.

[Barry Ritholtz]

Really, really interesting. Thank you, Jeff, for being so generous with your time. We have been speaking with Jeff Chang, co founder and president of vest. If you enjoy this conversation, well, check out any of the 600 we've done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you get your favorite podcasts. I would be remiss if I didn't thank the CROC staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer.

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[Barry Ritholtz]

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