Financial Products for Hedging with Vest Co-Founder Jeff Chang

Episode Summary

Executive Summary: The transcript centers on a Bloomberg interview with Jeff Chang, co-founder and president of Vest, about building defined-outcome ETF products that use options to provide buffers, income, and more predictable risk. Chang traces his path from the Naval Academy and Wall Street through Y Combinator to Vest, emphasizing grit, partnerships, and solving painful investor problems. He argues that hedging and product design can better manage uncertainty than traditional stock-bond diversification alone.

Main Topics: Jeff Chang’s career path and formative experiences: Chang explains how his military background, CPA training, and Wall Street roles shaped his work ethic, risk awareness, and desire to build financially useful products. Founding Vest and joining Y Combinator: He describes launching Vest with a mission to solve downside-protection problems, then using YC to refine the startup, choose the ETF wrapper, and build around a real customer pain point. Defined-outcome / buffer ETF structure: Chang details how buffer funds protect the first portion of downside in exchange for capped upside, positioning them as a way to manage risk more directly than relying on bond diversification. Income strategies using options: He discusses covered-call approaches across equities, fixed income, gold, and crypto to monetize volatility and generate yield for investors seeking income. Silicon Valley vs. Wall Street mindset: Chang contrasts Wall Street’s aversion to failure with Silicon Valley’s acceptance of iteration, arguing Vest blends both cultures by prioritizing disciplined experimentation within a regulated industry. Behavioral finance and simplifying complex products: He uses the idea of 'bagged apples' to explain why packaging options inside ETFs makes sophisticated hedging more accessible and easier for advisors to use. AI, investing, and future opportunities: Chang suggests AI is reminiscent of the dot-com era and believes many of the biggest winners will still emerge from startups, including those in YC.

Key Arguments: Grit matters more than raw intelligence: Chang argues perseverance and resilience are the top traits for success, ahead of creativity and intelligence. Successful businesses require partnerships and influence, not solo effort; product adoption depends on convincing investors, employees, and advisors to believe in the vision. Risk management should be built into portfolios explicitly through hedging, rather than relying only on stock-bond correlation. Buffer ETFs solve a real pain point by giving investors defined downside protection and capped upside inside a scalable fund wrapper. Options are often misunderstood; packaged in ETFs, they become more usable for financial professionals who face compliance and operational constraints. Income is a major investor need, especially for retirees, and covered-call strategies can generate yield across asset classes. The ETF structure can improve tax efficiency versus mutual fund implementations, particularly through in-kind creations/redemptions. The market still thinks too much in two dimensions—stocks and bonds—when portfolio construction can be more deliberately shaped with derivatives. AI is likely creating a new wave of companies, but many of the biggest long-term winners may still be early-stage firms. Failure should be treated as part of learning and iteration, but in regulated finance, experimentation must be disciplined rather than reckless.

Data Points: Vest assets under management: $50 billion - Barry Ritholtz introduces Vest as managing over $50 billion in ETFs. Time without pay when founding Vest: 4+ years - Chang says he and his co-founder lived off Wall Street bonuses while building the company without salary. First buffer mutual fund launch: 2016 - Chang says Vest launched its first mutual fund in 2016. First buffer ETFs launch: November 2019 - Vest launched its first buffer ETFs after in-kind creation/redemption for options became available in October 2019. In-kind ETF option for options: October 2019 - Chang references the regulatory change that made ETF structures more practical for options-based strategies. Buffer level on S&P 500 example: First 10% protected - He explains a typical buffer strategy where the first 10% of downside on SPX is protected. Upside cap example: 15% - Chang gives an example where upside is capped at 15% if the market returns more. 2022 market drawdown example: SP down 22%; buffered strategy down 12% - Used to illustrate how buffer funds can reduce losses in a weak equity year. Covered-call distribution yield example: 8%+ - Chang says KNG’s distribution yield was over 8% in the past year. Coverage level in covered-call strategy: About 20% of each name - For KNG, he says they cover roughly 20% of every individual stock position. High-yield covered-call distribution example: Double-digit - He says the high-yield strategy (HYG-based) can generate a double-digit distribution yield. Bitcoin income strategy yield example: About 18–19% - Chang says Vest has a Bitcoin-focused target income strategy yielding around 18–19%. Bitcoin weekly call coverage: 20–25% of the portfolio - He says the strategy writes calls on roughly one-fifth to one-quarter of the position weekly. Y Combinator deal size cited: ~$500,000 for 7% - Ritholtz describes the standard YC deal structure. YC class success rate stated: 4% to 5% - Chang says YC tells cohorts that around 4% of attendees may become billionaires, and later mentions about a 5%–6% unicorn rate. YC’s influence on super-unicorns: 20% since 2012 - Chang cites a statistic that YC funded 20% of super-unicorns since 2012.

Pivotal Quotes: "“The problem always existed and we thought that was a noble problem and a painful enough problem to seek.”" — Jeff Chang: Explaining Vest’s startup thesis and YC’s problem-first philosophy. "“Grit, influence, creativity, and last is intelligence.”" — Jeff Chang: His hierarchy of traits for entrepreneurial success. "“This is the stay-rich game.”" — Jeff Chang: Describing the purpose of buffer and income strategies for investors who are focused on preserving wealth.

Implications: For investors and advisors, the interview highlights a shift from traditional stock-bond thinking toward explicit downside protection and income engineering. It suggests ETFs can make sophisticated options strategies more scalable, tax-aware, and client-friendly as demand for defined outcomes grows.