Everything Was Blowing Up

A world without central clearing is a scary place; you didn’t need to be in the front seat at a cryptocurrency hedge fund to observe the dance-through-a-minefield that occurred in the crypto market from 2022-2023. A major exchange (FTX) and the entire crypto credit market were wiped out (BlockFi, Voyager, Celsius, Genesis). The lack of a central clearing mechanism heavily contributed to the catastrophic deleveraging cycle.

Crypto can be so silly sometimes. You were so right about it all these years, friendly and open-minded Wall Street veteran!

However, let’s not forget that in 2008, the traditional financial system only survived due to government intervention. When Lehman Brothers collapsed, the absence of centralized clearing in several markets exacerbated the panic and liquidity crunch. That credit contagion was much broader and enduring across the broader economy (for the Gen Zers who missed it, the unemployment rate rose above 6% in August 2008 and only dropped below 6% in September 2014, more than six years later). In the aftermath of that carnage, there was a concerted effort to implement central clearing across as many markets as possible to cut off contagion from the start. But at what cost?

Benefits of Central Clearing

Central clearing’s core value lies in its ability to eliminate counterparty risk and increase market stability. By acting as the buyer to every seller and the seller to every buyer, central clearers like the DTCC in the U.S. provide a crucial safety net across their respective markets. Central clearers ensure that even if one party defaults, transactions are completed, maintaining market integrity. This safety net is why central clearing is a cornerstone of many modern financial markets, offering participants confidence that their transactions will be honored even in times of crisis.

There are Tradeoffs, However

While the benefits of central clearing are clear, the economist Thomas Sowell reminds us “there are no solutions; there are only trade-offs.” Central clearers, by their very nature, can also impose costs on the markets they safeguard.

This results from the fact that in several markets they are natural monopolies with concentrated market power. For example, it is in practice, nearly impossible to launch competitors to the NSCC (a subsidiary of the DTCC) in the U.S. equity market (the idea of trying is laughable). Any innovation within the U.S. equity market must effectively work through the DTCC.

That is significant power, and while each market is unique (FICC, another subsidiary of the DTCC, clears government securities, while CLS clears foreign exchange), the issue often boils down to the extent of the monopoly-like power held by the clearer in each respective market. Even in relatively “competitive” clearing markets, establishing and maintaining a central clearer is often prohibitively expensive. Consequently, competition among clearers is typically minimal due to the high costs and substantial barriers-to-entry.

This monopoly-like power affects clearers’ willingness to either innovate or support innovation. In general, clearers have little incentive to adapt for new products or streamline integrations for new entrants. You must integrate or build to them; they will not come to you, and they can be risk-averse given their systemically important positions. They generally have significant power over the future direction of the markets they serve, as they can decide who to partner with and allow into the market on the new product side.

If these core market infrastructures do not choose to innovate, they can impact end-users by negatively affecting the dynamism of the market.

Houston, We Have a Problem

We have a central clearing innovation problem across several markets, whether the market wakes up to it now or in five years. There is no putting the crypto genie back in the bottle. The most fertile period of technical financial product innovation in history has occurred in the crypto space over the last five years, as teams of 3-4 people can launch new products into a global, ultra-competitive marketplace. The freedom from the myriad traditional market constraints and barriers-to-entry (which include the need to integrate into a central clearer) has allowed for unprecedented new product experimentation. Before we can even finish an argument about how “crypto has no inherent value”, a new product iteration cycle across twenty new crypto derivatives have occurred.

Conclusion

The market should serve end users with the best product. Stability and security through central clearing is an important part of that end product. But those are not the only parts. If new products eventually become materially better in other ways (despite lacking stability and security), the market (the sum of end users, with their preferences) will eventually become willing to forgo stability and security to use the new products. If that occurs, the market will develop greater systemic risk as market participants skirt domestic U.S. markets (which generally have the benefits of central clearing) for other markets with less stability and security to access the new products. This is already happening on a small scale. We need to create the conditions for both financial stability and dynamism to protect the U.S. market, or we will have neither.

But, given the stakes, has the investment market for late-stage (6-12 year old) technology companies evolved fairly? Who is reaping the upside for technology start-ups as they turn into real companies? What is happening to access, fees, transparency, and liquidity of the shares of these companies? Is the market healthier today than it was in the past? Are any entities exploiting the current late-stage market for their own gain at the expense of other market participants?  

These are important questions, and given the amount of money at stake (read: all of the money), if a brave soul asked those questions, I wouldn’t interrupt...

Tech IPOs are Happening Later and Later

Most of the current leading technology companies of today were public companies before most of their value creation. Someone that invested $10,000 into each of the Magnificent Seven companies in the public market in the month after their IPO, and had the diamond hands to hold until March 2024, would have made, assuming reinvestment of dividends: 

• Apple (1980): $22,598,349 (actually higher, back-test only went to January 1986)

• Microsoft (1986): $40,496,959

• Amazon (1997): $7,185,261

• Netflix (2002): $7,722,634

• Google (2004): $312,826

• Tesla (2010): $990,180

• Facebook (2012): $182,607

The “Later and Later” technology IPO trend that began with Google and continued with Facebook has now become common in the marketplace (See Jay Ritter’s excellent study here). Six-to-eight years of being private have turned into ten-to-twelve years.

There are roughly 1,200 private companies now valued above $1 billion, a valuation higher than the average of the pre-Google IPO valuations in the Magnificent Seven (Apple, Microsoft, Amazon, and Netflix). See below for the inflation-adjusted sizes in terms of market capitalization of the Magnificent Seven companies at the time of IPO:

• Apple (1980): Approximately $403 million

• Microsoft (1986): Approximately $1.17 billion

• Amazon (1997): Approximately $1.03 billion

• Netflix (2002): Approximately $602 million

• Google (2004): Approximately $43.35 billion

• Tesla (2010): Approximately $2.65 billion

• Facebook (2012): Approximately $152.12 billion

Notice the trend? Who wins and who loses from companies staying private longer than they used to? Let’s jump right into it…

Who Loses

Investors

Investors care about access, low fees, and liquidity. Both public (by not being able to invest in companies) and private (by having to pay 2/20% to invest in the companies through a fund) investors are worse off because companies remain private for longer:

• Investor access is worse. In a well-functioning market, as many investors as possible have access to the widest range of opportunities at low cost (without paying gatekeepers for that access). Public markets are open to all. Funds are only open to a more limited pool of accredited investors with some only accessible by qualified purchasers.  

• Fees are worse. Public shares do not have any ongoing fees for investors. Funds have management and incentive fees. Funds usually charge a 2% annual management fee and capture 20% of the appreciation of the companies through incentive fees.

• Shares are locked up in funds instead of being freely tradeable. In public markets, investors can sell their shares in a marketplace and “exit” whenever they want. Ten-year lock-ups within funds (or individual locked-up positions until an exit) are worse for investors relative to freely traded, liquid public shares. 

Employees

Employees are also worse off because they have to wait longer to sell their shares for cash and their common shares are not treated equally in private markets:

• Employees wait significantly longer to “cash out”. Employees would rather receive liquidity by converting their shares into cash in a shorter time period. The longer they wait for the liquidity received in the public markets, generally, the worse for employees.

• Their shares are not treated equally in private markets. A market is fairer when the underlying asset is fungible (tradeable 1-for-1). When a company goes public generally all shares convert into the same type (common shares) and there are regulations around the equal treatment of shares to protect shareholders. But shares in the private market are not fungible and shareholders are not protected. There are different share classes, with investors negotiating unique, favorable terms through preferred share classes. How do you think that ends up for the common shareholders (employees)? Not well. If only there was a giant pool of capital that would be willing to invest in common shares...

The Health of the Market

Well-functioning and healthy markets have competition, open access, transparency, and liquidity. The public market has these things, but the private market does not:

• Price discovery is worse in private markets. The more market participants with a view on the price, the better that price is (the power of price discovery). A company has a fair price, whether it is traded privately without liquidity or publicly with liquidity. The marketable price (what someone can get for selling or buying their shares) is more likely to be closer to the fair price if there are more market participants “voting with their feet,” nudging the marketable price towards the fair price. The public market has more voters due to its significantly greater liquidity.

• Private markets are opaque. Public markets are transparent. In private markets, it is difficult to know the real value of a company and asymmetric information leads to investors “in-the-know” having real advantages over those that don’t. These investors “in the know” know very well how different companies are performing and have advantages over other investors who don’t. While insider trading is still illegal in private markets, it’s way less enforceable than in public markets. 

Neutral

Companies

A company is its own entity. There is always some separation between the company and the people running it, because one is a legal entity that lives in a filing cabinet in Delaware, and the others have human bodies and do human things. That is fine, just the reality. I too am a human.  

A company has a fair price or valuation, and it just wants to grow. This company’s fair price is its fair price, which makes it somewhat feel neutral to whether it is traded privately or publicly. A bad company is a bad company, a good company is a good company, and no amount of liquidity in the public markets or illiquidity in the private markets can change that fact. 

The volatility of a company’s stock price is also irrelevant to its fair price. One of the largest complaints against public markets is the volatility of having a day-to-day reminder of the market’s perception of the value. But the harm of the short-term nature of public markets and the associated “overreaction” to quarterly reports is way overstated. The public market is intelligent and perceptive. It is certainly a better evaluator of a company’s value than any handful of private actors. The market is willing to look past bad quarters, halves, and even years if the opportunity for growth down-the-road is clear and the company’s leadership has a plan. 

There is a good argument (rarely made) that having more scrutiny and coming to age in the public eye is a net benefit for the health of a company. The public market provides an important signal to companies if some of the wider range of public voices suggest a change in direction, either through commentary or by selling their shares. Public scrutiny seemed to work well for the Magnificent Seven, who effectively managed (and improved) through terrible years and drawdowns:

In terms of costs, there are certainly company incentives around the costs of going public (underwriting is the largest expense), and quarterly reporting is a material ongoing expense. But the cost of capital overall for public companies is lower, and the range of financing opportunities (including at-the-money sales, bond issuances, and secondary issuance) is broader.

In summary, it is difficult to generalize for all companies, and the fair price remains the same in either case, so we will go with later IPOs as being neutral for companies (with a gentle-lean negative for good ones due to a lower cost of capital when public). A bad company without future prospects won’t exist for long in any market.

VC Funds

VC funds are complicated because it is also difficult to put the group in a box. There are pre-seed and seed-focused funds, Series A-focused funds, Series B-focused funds, etc. Generally, the funds that invest in earlier stages write smaller checks and have more time pressure for realizing the return on their investments. Later IPOs and realizing returns over a longer period of a time can be a disadvantage depending on the specific investment or company.

With that said, VC funds also benefit from limited, exclusive access to follow-on rounds or investment opportunities as the companies mature. The later stage the VC invests in, the closer it behaves to a late-stage growth fund. As a result, we will put later IPOs for VC funds in the neutral category (with later IPOs being a very gentle-lean positive, due to access advantages in later stages).

Who Wins

The C-suite

As mentioned earlier, a management team (the C-suite) is separate from a company, though in many ways they are often aligned. The management team of companies and whether they lose or gain from later IPOs is not immediately clear. Like employees, they have stock in the companies. All things equal, they would prefer to convert the stock into ski chalets within a reasonable timeframe.

But unlike other employees, the C-suite has more control, more responsibility, and more directly face consequences if there are suboptimal decisions on the capital markets side (like a decision on when to IPO). The pressure on the management team after a bad year in public markets is intense. While that pressure may be long-term good for the company’s prospects by indicating a need for a change in strategic direction, it can be short-term bad for the current management team.

There are other considerations here, and this group is a more nuanced “winner” than the group below, but no one ever got fired for being private too long, so we will put the C-suite in the winner category.

Late-stage Growth Funds

This group is far and away the biggest winner from the shift to later IPOs. Late-stage growth fund managers (like Tiger Global and Coatue, among an increasing number of others) have more money, power, and influence (often expressed through board seats on the companies) than ever. They continue to grow and get stronger with every fund. Late-stage growth managers are the recently crowned “Kings of Technology”, no matter how many friends they lose, or how many people they leave dead and bloodied along the way.    

Philippe Laffont, Chief Investment Officer of Coatue Management, recently said, “In the past, you could go public with a $500 million market cap…[and] $50 million in revenue. Today, we think that you can’t go public without $1 billion in revenue, $10 billion in market cap.” What a curious view….

The Market is Headed in the Wrong Direction

The above is an earnest attempt to represent the general trend of late-stage technology company equity markets and the winners and losers from later IPOs. It may appear from the above that I am suggesting that late-stage growth funds and (to a lesser extent) the C-Suite at companies together have pushed IPOs back to suit their interests, with VC funds and the companies themselves as relatively neutral bystanders. A reasonable reader may think that I see this trend coming at the expense of investors, company employees, and the overall health of the market.

While that is exactly what I am doing, that argument could easily be criticized as an oversimplification given the complex motives involved in each decision regarding IPO timing. Actually explaining the dynamics of each idiosyncratic decision of when to IPO for each company would be a thousand-page document, which no one would read. There are a lot of pieces here in a complicated market and anyone evaluating it must approach the discussion with a “beginner’s mind” and humility. Noted. I am sure someone could argue that the “market is different today,” which I would be curious to read.

However, regardless of the causes, what is certain is the equity market for later-stage technology companies is headed in the wrong direction. Investor access should be improving, not getting worse. Fees should be decreasing, not increasing. Markets should be becoming more transparent, not less. Shareholders should be treated more equally, not less. And liquidity should be increasing, not decreasing. All of those are going the wrong way.

Suggested Structural Changes

There are significant structural changes that would have to occur over the next decade to get the market on the right track again for all constituents. Awareness and clear-sightedness on how the trend of later IPOs is clearly worse for some important constituent groups (such as investors and employees) are a first step. At a minimum there should be regulatory sandboxes, educational or advisory programs that demystify going public for management teams, showing its benefits. This would serve as a counterweight to the current growth-fund-led narrative, reverberating around conferences, regarding the need for companies to remain private longer (see the Coatue quote above). The earlier in a company’s lifecycle these are presented to management, the better. Recent early-IPO successes such as Elastic (6 years), Samsara (6 years), GitLab (7 years), DraftKings (8 years), Zoom (8 years), Crowdstrike (8 years), and DoorDash (8 years) should be highlighted.

There is certainly low-hanging fruit to gently nudge companies on the margins in the direction towards public listings. The going-public process should be significantly streamlined. Modifications to exchange listing requirements could go some ways. Technological improvement and competition within the underwriting process, the largest upfront one-time cost of going public, could help to simplify regulatory filings, investor outreach, and compliance. The government could reduce some of cost disincentives to be public, such as fees or ongoing reporting costs, or alternatively use incentives, such as deferred taxation or credits. 

If the low-hanging fruit cannot incentivize the C-suite to take the public leap, more drastic measures would need to be considered. For example, I do not hate the idea of using policy to embolden the management team relative to investor board members (either pre-IPO or post-IPO) to overcome the current incentive-trap problem. Providing management some protections from being fired for performance reasons in the first year or two after going public is an extreme but interesting example. These are the types of ideas that should at least be discussed, given what is at stake. There’s a lot more work to do here, and I’ll be interested in seeing how the public discussion evolves.

The Main Point

Investors used to be able to own the world’s most promising technology companies for free, instead of paying 2% annually, giving up 20% of the gains, and trapping their investment in an illiquid fund structure. They had the chance to turn $10,000 into millions.

Investors can’t do that anymore. Over the coming years, many investors will watch AI companies explode in value from the sidelines. That’s a problem.

Equity markets have their cocaine-bear-semiconductors, options have their Zero Days, but what do futures have? Where is the innovation? Where is the soul?

If futures weren’t so elegantly simple, perhaps we could forget it and let it go. Perhaps we could just buy NVDA and panic-sell it 15 minutes later for the tenth time this year (and it’s only Q1). Or maybe we could silently go and trade way-out-of-the-money daily options, because we too enjoy the thrill of low probability adventure. We might find solace in the haze and confusion of non-linear and complex modeling. It is a confusing world, after all. Maybe options are the product we deserve.

No, simple, linear futures were once the pride of Chicago. Before the financialization, before the casino, the first standardized corn contract opened at the Chicago Board of Trade in 1851, for hedging. Over the years on those wooden floors, through the ruthless anarchy of the pit, the modern derivatives market was built. Today she stands at a notional market of quadrillions of dollars, run mostly silently through computers (boring!). And, somewhere along the way, futures got left behind in the public psyche.

How Ceres cries tears of molten aluminum as she watches over La Salle! The best, liquid product for simple directional exposure, these powerful instruments for building two-way markets (long and shorts) and responsible leverage, have been unduly eclipsed. Please, do not throw ETFs at me. ETFs are not better, with their long-biased designs and hard-to-borrow rates (looking at you USO, you butcherer of oil!).

Some say the two-headed-monster duopoly in regulated futures markets are an insurmountable discouragement to innovation. They say the age of the future is over, that the product cannot evolve, and that it has not fundamentally changed for 150 years. They say that futures’ best days are behind us.

Do not believe it. The future will rise again.

The cryptocurrency market is sketchy, scammy, flawed, unregulated, volatile, empowers bad actors and generally has been an evil carnival for the past two years.

That being said, it is the greatest sandbox for financial market innovation to have ever existed. Never before has there been a single, interoperable playground for teams with new ideas to compete for global capital. Your application can near-instantly be rewarded with hundreds of millions of dollars of asset deposits, or be destroyed and left for dead in a single afternoon.

The Market is Ruthlessly Competitive

The crypto market is ruthlessly competitive, which accelerates innovation. There are almost no barriers to entry (unlike traditional finance, where there are understandably large regulatory hurdles, paired with deeply-entrenched hundred-year-old incumbents). In crypto, new competitors can literally just copy your code and “go”. If another competitor appears to be marginally better, there are no frictions in the system that keeps users from transferring funds out of projects instantly. As a result, applications are forced to invest heavily in marketing and building loyal global communities, because users are not captive and moats are weak and small.

The cost of this sandbox is high. The Silicon Valley ethos of “move fast and break things,” when applied directly to money and investments, has resulted in billions and billions of dollars of assets lost, stolen, or held by bankrupt companies. Crypto users can be separated from their funds dozens of different ways — through bad custody practices, accidental transfer errors, smart contract hacks, or one of the many well-honed malicious tactics mastered by country-level hackers. Play carefully here, the sandbox is dangerous.

The Technology and Innovations are the Value

The common argument “crypto assets have no value, it’s fake internet money” misses the forest for the trees. The technology and innovations are the value. And these ideas will make their way into the existing capital and payment market regimes, because many of them (though not all of them) are better.

The grey-haired wall street veteran (no offense intended, I have some grey hairs) has an instinctive distaste for the cryptocurrency market. But, everyone that has worked with operations, and middle or back office teams, will admit there is a problem with existing payment and capital market infrastructures.

The current system evolved piecemeal from one built to store gold and paper certificates. Before crypto, digital innovations were built off that archaic foundation. The build-up of structural friction across the system as a result is offensive. Crypto offers a clean, digital-first, break.

The biggest winners of the next five-to-ten years of financial market innovation will be those that find out how to bring the innovations into traditional financial products, investment communities, and markets. And that will be hard. As in actually hard (not launch some token and flip it to retail in six months hard).

Integrations, navigating through regulations (and lobbying regulators to change regulations where needed), developing user protections, competing with entrenched market infrastructures, and breaking into the Club of Wall Street are all tough things. They would be hard to break into even in a supportive fundraising environment. But it is worth it to try — capital and payment markets are absolutely massive and the system needs a refresh.

The Top Five

Below is a top five list of innovations in payments and capital markets from the cryptocurrency market. Like all innovations there are good and bad aspects to each. For brevity’s sake I’ll give a cursory overview of each with links to resources that explain them in greater depth.

1. Self-Directed Custody

Crypto, for better or for worse, gives users the option to completely unlock money or assets from third party banks or custodians. Anyone can custody (through private keys) an infinite amount of money or assets themselves with a single little USB device (or software wallet). Users have the option to send funds or assets where ever they would like. They miss out on core protections (general money or asset safeguards, central clearing, SIPC/FDIC insurance) but gain autonomy, user power and choice.

2. Stablecoins

Stablecoins like Circle’s USDC, Tether’s USDT, and now Pay Pay’s PYUSD (among other fiat-backed versions) hold reserves held in traditional bank accounts, money markets, short-term treasuries, etc. But unlike holding money in a bank account, you can use any application or interface you’d like. You can send payments to anyone, anywhere within seconds, 24/7/365 globally. In the process you can bypass many of the frictions, delays, and predatory fees that occur across different types of payments both internationally and domestically.

3. Perpetual Futures

Perpetual futures (futures that never expire) first launched on BitMex in 2016 as a hedging tool for bitcoin miners. Ever since then they have dominated crypto futures, with a 98%-2% market share lead over traditional expiring futures. Unlike traditional futures where the future converges to spot or index price upon maturity, perpetual futures maintain alignment with underlying spot or index prices through a funding rate mechanism, with micropayments between the long and short sides.

4. Decentralized Exchanges

When using decentralized exchanges, you do not trade through a company, but through code on a running blockchain which matches buyers and sellers. If the company developing the decentralized exchange went bankrupt, the exchange would still work. The code lives on a blockchain and the blockchain itself cannot go bankrupt, meaning the decentralized exchange is forever. On the market making side, any market participant can easily deposit funds into pools to provide liquidity for these exchanges and capture trading fees.

5. Decentralized Lending

With decentralized lending applications you are also interacting purely with code. There is an automatic, coded margining system. After depositing assets into a smart contract, users can borrow against those assets. The major decentralized lending applications operated without issue through the 2022-2023 market while crypto lending companies were entirely wiped out (BlockFi, Genesis, Celsius, Voyager Digital). Rates to lend or borrow are both better in crypto than with traditional stock brokers. Taking 50% of a user’s asset lending profits, as seen in stock lending programs through E*Trade or Interactive Brokers, would be uncompetitive in crypto. Same with charging a hefty 13% to borrow on margin.

Conclusion

These and many other crypto innovations have promise. But, there is significant work left to do. Crypto is currently stuck in “PvP” zero-sum world where high-net-worths and small-to-medium sized crypto funds trade in circles.

Fintech innovators should build products that attract real size and volume from traditional finance behemoths. In order to do that, start-ups will have to better acquaint themselves with the complex, regulated markets of traditional finance. BlackRock’s requirements are different from Johnny Crypto’s.

Traditional finance firms are risk-averse, follow laws, and need to know that there are no edge cases where their assets disappear. Building products that work for them may mean making compromises with design decisions, meeting regulators halfway, and prioritizing integration into the existing financial system where required.

Even with that approach, it will still be extremely difficult for fintech start-ups to gather critical mass in the face of powerful incumbents. But for those that do, what will be the reward? A better, more competitive financial system, freer from the curses of costly frictions, captive users, and archaic infrastructures.

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Introduction

Everyone has a different amount of leverage (or exposure) to current market conditions. Since March of 2020, we’ve had three distinct market regimes (terrible→terrific→terrible).

Friends, colleagues, and enemies alike have had both tremendous successes and catastrophic failures over this time. The extent of pain in 2022-2023 (and success in 2020-2021) was in large part due to exposure to the market. During this time, the macro forces have been so powerful that idiosyncratic performance both career-wise and investment-wise often took a back seat to broader market conditions.

Current tough market conditions manifest differently for people:

1. The value of vested equity compensation in companies has significantly devalued

2. Startup are scrambling for suboptimal funding rounds while downsizing growth targets

3. Allocators are having difficulty raising capital (even name-brand or second/third funds)

4. Even the 60/40 equity/bond portfolio experienced major drawdowns

Those with a more low-risk and steady approach to their career or portfolio have managed through better. While they had intense FOMO when the 2021 market was cocaine bear, the last year and a half has been a relatively good period for the more risk-averse.

What is Your Market Beta?

Understanding your own market Beta helps you review whether your market exposure aligns with your risk tolerance. Are you positioned more like a volatile technology stock or a stable utility company?

In the equity markets, the S&P index, is a benchmark. A Beta of 1.5 signals a 1.5% change for every 1% market change in the S&P. High Beta relates to higher exposure to market conditions (growth names like technology), while low Beta denotes less market exposure (value names like utilities).

Assessing your market Beta involves holistically weighing current and future projected income from career and investments, outstanding debts (student loans and mortgages), and living expenses/costs. People starting to try to build wealth can ask themselves two questions:

1. What is your benchmark based upon your risk tolerance?

2. Are you holistically positioned to hit that benchmark?

There are advantages to both Low and High Beta strategies at different times and there are even advantages to dynamically changing strategies. A common approach is to have a higher Beta benchmark in your early career, although individual risk preferences vary. My grandma still full-sends in the equity market and it’s worked out.

The Low Beta Approach

The consultant, account, lawyer, or corporate warrior who has predictable cash compensation each year and invests into money markets or short-term treasuries is low Beta. The cash flows are predictable, comfortably stable, and income will vary with economic conditions, but not to the extent of other careers or portfolios.

This bucket also includes jobs with a high cash percentage of compensation, or low compensation variability. Bankers in non-cyclical verticals with steady business or developers paid with mostly cash fit here. As do those running a market-neutral hedge fund, or risk-averse investment portfolios (retirement accounts, money market, short-term treasury or low volatility value stocks).

The High Beta Approach

Launching or working for an early-stage start-up is high Beta, as your ability to raise capital to expand your business (and stay afloat), increase early stage revenue, and eventually exit all depend on market conditions.

Working at a venture or hedge fund is also high Beta (for capital raising and directional fund strategy performance). Employees with a high equity (relative to cash) compensation package fit here. Roles like real estate agents or business development can experience sharp market cyclicality, as transaction volumes fluctuate with broader market health. High-risk investment portfolios with large equity, growth, or market-exposed alternatives belong as well.

Adjusting Your Market Beta

People often adjust their market Beta by changing careers or altering their investment portfolio's risk level. For example, a consultant can increase their Beta by investing heavily in the equity market or startups, whereas a startup employee might invest in short-term treasuries to reduce market exposure.

Idiosyncratic Exposure and Diversification

While market conditions play a substantial role, individual performance or idiosyncratic exposure ultimately should drive in the long term. Poor market conditions are not an excuse for poor allocation decisions when you answer to stakeholders. Moreover, diversification is key, ensuring that different elements of your portfolio (career, real estate, investments) aren't overly correlated, thus mitigating risk.

That’s 700 words and I’m out! Until next time…