00:00hi and welcome to the a 16z podcast as
00:02the average consumer gets access to more
00:05and more information that used to be
00:06reserved for trained specialists we're
00:08starting to see new asset classes form
00:10that are changing the way that we think
00:11about banking and investing in this
00:14episode chief strategy officer and
00:16co-founder of open invest Josh Levin CEO
00:19of quanto peein John faucet and a 16 ZZZ
00:21Angelus strange talk about interesting
00:24new models for both retail and
00:25institutional investors and what impact
00:28they might have this conversation was
00:30recorded at our summit event in November
00:322017 Josh a lot of your team comes from
00:35Bridgewater which is now you know one of
00:37the better known hedge funds especially
00:39after Ray's Ray Dalio book has come out
00:41why why would someone come to an
00:43investor for a trading strategy that
00:45doesn't exist somewhere else sure so I
00:47spent the last decade in the impact
00:49investing and sustainable finance space
00:52dealing with a lot of the world's
00:54largest institutions banks and investors
00:56and I was constantly getting pummeled by
00:59individuals and small and mid-sized
01:01institutions asking how to do this how
01:04can we get involved how can we do values
01:05based investing and there's basically no
01:07solution for them I think the three big
01:09mega trends in wealth management you
01:11should know about is a move towards
01:12passive investing I move towards
01:15interest in socially conscious investing
01:17and then just better digital tools
01:19awesome digital interface and we
01:21realized that we could take their
01:22skillset and point it towards instead of
01:25beating the market point it towards
01:27passive investing towards buying and
01:29holding the market but actually point
01:31the customization towards people's
01:33values I come on to your site and I say
01:35I want to invest in or I don't want to
01:38invest in weapons companies how does how
01:41you start with an index with tons of
01:42personas I started the universe and we
01:45don't just pull out the four weapons
01:46companies that would be in the index
01:48that would be stock picking that be
01:50active management our system will
01:52instantly break apart the entire
01:53portfolio and tweak the other holdings
01:56that are correlated with those four
01:58weapons companies on all the important
01:59vectors to match the characteristics of
02:02the index so the client is restored to a
02:04beta of one or two trod Li tracking that
02:07index but they no longer hold weapons
02:09companies and so this is allowed it to
02:13sufficient and must much more customized
02:15for for clients of all sizes to
02:17implement their values in their
02:19portfolios so you guys support eight
02:20causes now it's time I think we have
02:23about a dozen and doesn't know working
02:25with institutions we obviously do a lot
02:26more a customization around their
02:28concerns how do you see that expanding
02:30like how many how many causes do you
02:32think you could or would want to support
02:34what's the new process for adding more
02:35causes onto the platform I mean there's
02:38no limit there for us we're moving into
02:40a world obviously with the greater
02:41greater transparency more and more data
02:43the key is to curate and have amazing
02:46design so that you can put the decisions
02:48of people's fingertips that they really
02:50want at the moments that they want it
02:51that's how we can empower the actual end
02:54owners of capital to have more of
02:56transparency and more say in what's
02:58happening with their money and that's
02:59sauce I love your tagline which is
03:01leveling the playing field on Wall
03:03Street but what do you mean by that
03:05there's just a huge imbalance between
03:07the amount of data that could be used in
03:09investing and just the number of people
03:11that are trained and equipped with the
03:13right tools to do it we have a platform
03:15that we give away for free sort of the
03:16opposite of every other Quan hedge fund
03:19in the world and that's a magnet for
03:20talent so we we attract people from all
03:22over the world who want to learn about
03:24the field and try their hand at creating
03:27creating strategies that produce
03:28superior returns how do you how do you
03:31find these clients where do they live
03:32the Saenger round coins open is you know
03:35you get what you asked for with the
03:36internet about half of our new traffic
03:38land on discussions about things like
03:41Markov chain models or common filters
03:43and trading or different research topics
03:46that people are trying out or papers
03:47they're trying to reproduce on the
03:48platform and so the content in the
03:52community and just the continuing
03:53discussion and and frankly it's an
03:55incredible incredible challenge to try
03:57to produce a good strategy that's that's
04:00the magnet that draws people and that's
04:01the basis of all marketplaces if you
04:03think of something like air B&B what
04:04does their platform actually do it not
04:06only maxes people with rooms with people
04:09who want to rent but there's also our
04:10ratings components scheduling components
04:13what are some of the things on your
04:15platform that quants really need there's
04:18a couple of things you just absolutely
04:19have to have if you're gonna be doing
04:21quantitative the best thing and the
04:23first is you need market data so you
04:25of the the data ecosystem you need
04:28corporate fundamentals in order to build
04:30up a universe and then you need data
04:32from which you can draw a signal so we
04:35have a platform that has a consolidated
04:37data plan quantitate investing you're
04:39running a lot of historical simulations
04:41when you run the simulation you want to
04:43have as traded data on the simulation
04:46day so that's key and then there's a
04:47workflow and one of the things that we
04:50get to do this really fun is we can
04:52observe the behavior of the quants that
04:54are on the platform and then we get to
04:56see how their stuff performs on a sample
04:59we've noticed that the people who have
05:01good outcomes out-of-sample when we're
05:04testing after they've created an algo
05:05it's been about a hundred times the
05:07amount of time on the research step and
05:10then we have a second piece which is
05:11actually about making the algo that's
05:13gonna do the trading and so some people
05:16will spend all their time in the algo
05:18editing and tweaking it and back testing
05:20over and over again and kind of
05:22intuitively they end up with something
05:23it's very overfit yep whereas the people
05:25who spend all their time in research
05:26they come up with a bunch of ideas that
05:28they eliminate for different reasons and
05:30the research step and they do far less
05:32relatively speaking back testing and
05:34they tend to have great success so I
05:36find it somewhat reassuring because that
05:39is the creativity step right that's the
05:41step that really is still very very
05:43dependent on human creativity and that's
05:47that's the thing that ultimately
05:48prevails how do you judge of these
05:50quants or any good right I imagine
05:52there's a wide spectrum of here but come
05:54on from beginners you know there's
05:56everything one key thing I mentioned
05:58overfitting that is a huge trap there's
06:01a lot of statistical traps for these
06:02types of strategies so you know a first
06:06step is to try to eliminate that as much
06:08as possible so when someone comes to
06:09quant open they actually are creating
06:11their strategy in the browser you know
06:13on our system and so we're building this
06:15big database of strategies so it's in a
06:19database and it's marked with the day
06:20and that one piece of information is
06:23incredibly important because a mark
06:26makes a bright line between the data
06:27that's in sample that the author could
06:29have known about when they were working
06:30and then everything that happened
06:32afterwards and so then you can do
06:33comparisons statistically between the
06:35out-of-sample and the in-sample and you
06:39many overfit strategies so that's key to
06:41the evaluation and then downstream from
06:43that there's like 50 features now from
06:46from each strategy and starting to tests
06:48on the predictive efficacy of each of
06:50those features and you know building up
06:52our own sort of meta he'll go for the
06:53for the evaluation we can run from the
06:57database of all goes all the way through
06:58to here's a recommended portfolio we can
07:00run a historical simulation of that
07:02portfolio of algorithms and that's
07:04really important because we can pick up
07:06the entire investment process and apply
07:08the same rigor where we can do in and
07:09out of sample testing on our process and
07:12that's really key for making investment
07:15into a software business where we're
07:17doing incremental improvements on on
07:19this piece of software that is our
07:20investment process you're also tracking
07:22the behavioral data of where yeah so
07:26let's jump into shareholder activism
07:28which you you often think of you know
07:30the large large investor is acquiring
07:3210% of a company and everything
07:34management but I think what we mean in
07:36this concept is just our people voting
07:39on the votes of the day I would have a
07:41chance to so like 90% the sets is just
07:44came in 90% of institutional investors
07:45are very involved in proxy votes whereas
07:48the number for retail is something very
07:50low so what do you hope is the
07:52engagement that comes out of retail so I
07:54don't know if you own individual shares
07:56and companies but if you do you get this
07:58giant paper packet in the mail and
08:01nobody reads I mean you need like a law
08:03degree in a free weekend and actually
08:06disrupting that paper packet was one of
08:07the initial conversations that led to
08:09this whole company it's a nightmare on
08:11the back end but we just released the
08:13ability for clients to vote and share
08:15all the resolutions with a swipe on
08:17their smartphone like tinder and part of
08:20its curation so you just see the boats
08:22you'd care about Oh Proctor and Gamble
08:25is having a vote on LGBTQ rights in the
08:27workplace which just happened did you
08:29get the 2 cent summary a link to learn
08:30more swipe your vote share with others
08:33move on to the next vote even just
08:35taking the individual shareholders
08:36directly and indirectly owned nearly 80
08:38percent of US equities markets we have
08:40collective control of a lot of these
08:42companies and no one's using their legal
08:44rights because it's been obfuscated but
08:46we've been cutting through all of that
08:47as part of this broader mission to
08:50create a toolkit that shifts some of the
08:52this massive chain of intermediaries in
08:55the value chain more towards the end
08:57owners of capital which is individuals
08:59families and institutions and to us an
09:02example of a very important vote that
09:04came up recently very good impact
09:07because you could make the argument like
09:09ah who really cares like it's a diffuse
09:11number of individuals it's not gonna
09:12have like a really significant impact
09:14the spring is the big season and there
09:16was actually a seminal vote last spring
09:18with Exxon on climate change where 60 to
09:2263 percent of the votes were in favor of
09:25Exxon reporting on the risks of their
09:27business from a regulated two-degree
09:29world which was a big deal we just had a
09:32vote on oracle and whether they should
09:35report on the gender pay gap in their
09:37company and what they're gonna do about
09:38these things are going on all the time
09:39and people know these brand names and
09:41they care about the issues it's just
09:43that no one's given them the ability one
09:45of the big debates going on in the
09:46investment world right now is the whole
09:47trend from active to passive and lots of
09:52numbers around there but I guess about a
09:53decade ago there were a fifth of assets
09:55under management which were passive now
09:57it's up to a third this is a good thing
09:59for investors you see as continuing I
10:01see it from two angles one angle is
10:04actually you know indexing is gray when
10:06the markets are all going up so then if
10:08we have like a 25 percent correction
10:09what are all these index holders going
10:11to do and so I think that's a real an
10:14important risk and just in you know sort
10:17of my god like everyone doing the same
10:20thing when does that ever been a good
10:22outcome for markets right so I think
10:25it's legitimate to have some concerns
10:27there's a lot of talk about like the
10:28change of the market structure and what
10:30will happen if everyone's indexing at
10:32the same time the other angle that I
10:33take on it is this is automation you
10:36know this this is this is applying data
10:39and and software to building you know
10:43portfolios at a mass scale for for both
10:46retail and institutional investors its
10:48lowering costs I mean it's it's it's
10:50really really incredible how low the
10:53cost is to be exposed to two indices via
10:56these instruments so you know I think
10:59there is just inherent good from
11:01lowering the cost particularly for
11:02retail investors and so I think I think
11:06there's an equilibrium somewhere that we
11:08have to reach where it's probably higher
11:09than it has been historically but it's
11:11not 100% and I think for institutional
11:15investors there's a real need for
11:17actively managed portfolios because they
11:20have different needs right so they're
11:22not just trying to appreciate their
11:23assets they have to be defensive the
11:24posture they have to be prepared for
11:26their obligations year to year and so
11:28there's there's always gonna be a need
11:29for for active management it's
11:31interesting to see it like we're going
11:33to settle out in terms of the max I
11:35think there's a trend especially among
11:37the Millennials but even broader just
11:38being more globally conscious more cos
11:40oriented like how do you see open invest
11:43progressing like do you do you foresee
11:46like more and more investors are gonna
11:47care about what they're really investing
11:49in and that's gonna be like a big
11:50attraction away from passive investing
11:52because you're sort of this mix between
11:54your active because you really care
11:56about the causes but it's passive
11:58because it somewhat creates a new index
12:00so if we have a paradigm of mutual funds
12:04then the next revolution was ETFs and
12:07index investing and then there's a third
12:09paradigm coming which is there's a post
12:11fund future coming right why are we all
12:13in these cookie-cutter vehicles why is
12:16the banking system built on slogging
12:18them because you're pulling against
12:20certain costs namely transaction costs
12:22what happens as transaction costs go to
12:24almost zero well instead of buying a
12:28fund you're just going to be renting a
12:30strategy from the cloud which will be
12:31buying and selling securities and
12:33optimizing for your goals financial or
12:36values and otherwise this is coming and
12:39we're at the forefront of it and our
12:42belief is that the banks are not going
12:44to lead it and if you talk to strategy
12:45groups at the banks they know it they
12:47see it but half their staff is based on
12:49slogging funds and maintaining that
12:51entire ecosystem and you have a finite
12:55population that doesn't have the
12:56financial literacy to necessarily demand
12:58it even though there's advantages so I
13:00think what's going to drive uptake
13:02towards the third paradigm is the values
13:05based conversation 85 percent of
13:07Millennials one investing company is
13:09aligned with their values right it's not
13:10going away and when you really open that
13:13Pandora's box with your stakeholders or
13:15with your family everyone has different
13:17values then next week you watch the
13:20prisons you don't want that it's
13:21changing all the time so you need an
13:23entirely new type of infrastructure to
13:25actually accommodate this that's what
13:28we're driving forward so in your user
13:30base is there big distribution in terms
13:32of the values or people like kind of
13:33tightly clustered around similar values
13:36like we everybody in the platform
13:37doesn't like gun companies or you know
13:39what's what's what's the distribution
13:40look like so with retail investors
13:43there's a lot of clustering around
13:45climate change there's no more an issue
13:47it's not just Millennials by the way our
13:49second biggest segment is 55 to 65 year
13:51olds and they are more focused on
13:54military and tobacco and younger people
13:57have different issues so for example
13:58we're currently onboarding entire
14:00pension funds and the pensioners
14:02themselves are going to be voting in
14:04real time on environmental and social
14:05political issues on their smartphones
14:07and we'll just be managing and
14:09rebalancing the entire fund and netting
14:11off the trades and it's passive for
14:14everyone but this is the type of power
14:16you start to be able to put the
14:17fingertips of actual asset owners when
14:21you have this hybrid model where you can
14:22have active management with a passive
14:24holding now let the software abstract
14:26away the financial complexity these guys
14:27they don't know about finances ation
14:29most people shouldn't be stop picking
14:30your guys should but most people don't
14:32let the software abstract that away but
14:34let people weigh in on the things they
14:35know and they care about and then you're
14:37also just getting to strengthen your
14:38client relationships plus I want to end
14:40on a similar type of question for you
14:42and you touched on this a little bit if
14:43you're gonna do funds across different
14:45asset classes yes but fast-forward 10
14:47years what is what does quanto peon look
14:50like in terms of scale of quants just
14:52paint the paint the future vision of
14:55well I think if we manage our business
14:58properly and we diversify these these
15:00funds there's an incredible number of
15:02people around the world who are being
15:03trained in different analytical and mono
15:06blowing fields that just you know aren't
15:08getting into the market which is
15:10creating jobs in finance contrary to a
15:12lot of that is just a different kind of
15:14job right the it's a much more my
15:17painting like creative job and the thing
15:21that we want to accomplish over the next
15:2210 years is if you if you think about
15:24the explosion in data from the real
15:26economy we want to have total coverage
15:28we want every single data set that
15:30exists to have you know several humans
15:34try to extract signal from and try to
15:35derive meaning from it and then apply
15:36that into many many different investment
15:38vehicles there's just an enormous
15:41arbitrage-free for the taking and it
15:43really has to do with coordinating
15:45enough people to do the creative work
15:47and I think the machine you know it can
15:49really really add at the beginning in
15:52the end of the process of cleaning the
15:53day and tagging data getting it to our
15:56community to do the creative part of
15:58turning it into signals and then taking
16:00those signals and combining them those
16:01are the the right jobs for full
16:03automation and hopefully you know what
16:06have a massive amount of assets to
16:07deploy into these vehicles I think this
16:09is just the start of new models so we're
16:11gonna start seeing the space so I'd like
16:13to ask if everyone can join me in
16:14thinking thanking Boston Joe thank you
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