Troy Gayeski, Co-CIO of SkyBridge joins Yahoo Finance Live to break down why the economy is in great shape and weigh in on how Bitcoin is faring amid pandemic.

Video Transcript

MYLES UDLAND: All right. Let's stay on the markets and talk about everything going on right now. Troy Gayeski joins us now. He's the co-CEO of SkyBridge. Troy, always great to talk with you. Let's start with something that you guys have been quite interested in over at SkyBridge, and that's Bitcoin, and really, what's happening in the bitcoin space broadly.

Obviously, we've got the Coinbase S1 this morning. Everyone's very excited about them coming public. What are conversations with your clients like about having an allocation to the crypto space right now? How are they different, maybe, than what they would have been a couple of years ago?

TROY GAYESKI: Oh, it's really night and day. And when we walk through the thesis with them, what clients realize is, it's one of the more thoughtful ways to play continued asset inflation and massive money supply growth, which is very critical, because if you look at the last two bull market cycles, you had either the Fed tightening, or in the case of 2012, the Fed was still easy, but nothing like they are today.

So from a macro backdrop, if you're looking for ways to play currency debasement or continued asset inflation, given the massive run-up in money supply and budget deficits as we went through the decision tree, that was clearly our favorite expression.

And then the other two key components to the thesis, of course, are, basically, after every halving cycle-- go back to 2012 or 2016-- you've had these extreme bull runs, because whether it's houses or oil or Bitcoin or gold, if you suddenly cut new supply in half, you're going to have prices go higher, just if you keep demand constant.

And so the last halving cycle, Bitcoin went up 33X from halving to peak. The prior cycle, it was 19X. And obviously, we've enjoyed substantial gains since our entry point in mid-November, early December.

And then thirdly-- this is also very critical to the thesis, where back in '16, back in '12, very similar to gold back in '01 or '04, it was a fringe asset. You had-- not to say the Wild West, but it was more the Wild West in terms of service providers, custody. That's come a long way.

And what that's leading to is significant institutional adoption. And pretty much every week when you look at the headlines, whether it's Boeing getting involved or Tesla getting involved or Michael Saylor ramping up even more exposure, you look at the life insurance companies, endowments, et cetera, it's clear that it's going through an adoption very similar to what happened to gold in, really, 2007 through 2012.

One of the things that surprised us is, when we decided to go with Bitcoin instead of gold, we didn't think gold was going to sell off to the extent it has since it peaked in August and early September. So that's been a little surprising, that people have sold down gold to go to crypto. We thought, given how much cash is laying around-- you have over $3 trillion in commercial bank deposits, 27% more money supply, that that would be the primary source of flows, which it still is, but it's been a little surprising that people have sold down gold as well.

JULIE HYMAN: Troy, given that you guys have gotten into Bitcoin here-- I mean, you guys invest in hedge funds. You place money in hedge funds. Hedge funds used to mean there was actually a hedge. It's lost that meaning a little bit over time.

What's the hedge for Bitcoin? Because it doesn't seem to have-- there's always a chance it could fall, right, just the nature of how it tends to trade. But we haven't found a really good correlation, either negative or positive, consistently for Bitcoin. So how do you hedge it?

TROY GAYESKI: Yeah, so again, in different parts of your portfolio, you have different long or short biases. So I'll give you an example. A golden oldie that we've always loved and still have meaningful exposure to, is structured credit. And structured credit managers primarily play that net long, because if you have too large a hedge, you give away all your cash flow, and then you don't have upside the price appreciation, or what's termed carry. If you look at most long-short equity managers, they tend to be long biased.

But in this specific case of Bitcoin, we think it's a timely trade where you want to be long. You want to be long in size that makes sense given your overall asset allocation. And for us, we're still primarily long cash flow generative assets tied to housing or distressed corporate credit or low net exposure, long-short equity.

So you want to be at a size at cost where, if you're right and the thesis plays out as we expect, you have meaningful upside, but if you're either dead wrong because suddenly institutions stopped adopting, or for some unknown reason the Treasury comes out and gets really aggressive, you can tolerate the downside ball.

And then lastly, I'd say, you have to look at your volatility budget in your portfolio, and how much volatility can you tolerate? And we've historically been at the lower end of our target. And what we're articulating to clients is, hey, this could be a year where we're above that target, which has been 4% to 8% We could be 10% to 12%. But if you're going to make another 500 or 1,000 basis points from a very niche exposure that's still in the early stages of adoption, we think that's a great risk-reward, great trade-off.

And Julie, the other point you raised is, there are times it's non-correlated, there's times it's negatively correlated, and there's times it's positively correlated. You go back to the last six months, September was positively correlated to equities. And we tell clients, if we had the position on it in September, instead of being up, we would have been down slightly.

But guess what? In October, Bitcoin ripped on the news of PayPal and Square, and equities were off. And we've even seen this year, where week to week, day to day, you have some correlation benefits which you have to factor in as well.

ADAM SHAPIRO: Troy, you know a lot of folks. What's the rumbles or the murmurs when you talk to them about what's happening with GameStop? Last week, this week, the volatility is back in full force. Do they want to get in? Do you want people in this? What's the speculation?

TROY GAYESKI: No, that's a great question. And this gets back to, I think, a classic thing for managing portfolios and looking forward. You have to be humble. Coming into this year, I don't think there was an investor on the planet that said, the biggest risk that's going to show up in the third week of January is going to be these meteoric, credit-driven short squeezes. Everyone knew that retail had become more dominant. Everyone should know to avoid crowded shorts. But it was still a small left-tail risk.

And so what's basically happened, as you guys are aware, is, those that were too heavy in the short term got very aggressive covering it, and the short interest has dropped dramatically in GameStop in particular.

But more, I think, important for investors to understand is, the industry as a whole has really done a triple check on what their short exposure looks like. So since then, clearly, there's been more focus on how crowded a particular short is. You want to avoid that when you can.

Two, is to move up in market cap. Three is to become more diversified. Four is-- if you're really about hedging systematic risk, which is something that people are getting more and more concerned with, given the high levels of equity multiples, and as you guys alluded to, you're starting to see the steam come out of growth names the past seven, eight trading days, there's nothing wrong with using S&P futures or ETFs, if that's what you're really concerned about.

So on a go-forward basis, we'd expect short squeeze risk to be lower. And as we speak today, most of our contacts are-- even those that had tiny positions in GameStop or other of these meme stocks on the short side have closed those out, and there's been no P&L damage on the short side the past day and day and a half.

Now, interestingly enough, I know everyone likes to focus on who's getting squeezed and who's losing money, but know there were some hedge funds on the long side of that, where there was AMC, or Ligand was another one that kind of got juiced by the Reddit crowd. And so depending upon what side you were on, it was either highly profitable. But for the industry, as a whole it was certainly a negative P&L driver in January.

MYLES UDLAND: All right, Troy Gayeski, co-CEO at SkyBridge. Troy, it's always great to get your thoughts. Thanks for joining the show.

TROY GAYESKI: Yeah, great to see you guys, and gals, I should say.