Alpha Exchange

With deep roots on the sell-side, serving in strategist roles at both Miller Tabak and BTIG, Dan Greenhaus is now Chief Strategist at Solus Asset Managment, a multi-billion dollar AuM firm with expertise in distressed and high yield investing.  Our conversation considers economics in theory and practice, differentiating classic academic training from the role someone like Dan plays on a trading desk supporting clients, portfolio managers and an investment process.Here, Dan shares the importance of understanding what’s in the price and details his efforts to evaluate consensus by talking to other strategists around the Street to understand baseline expectation. This is some part of what he describes as his role as blindside tackle at Solus, working to identify areas of macro uncertainty that may be under-appreciated.We talk about the current state of the economy and the stance of Fed policy. On the latter, Dan argues that while the impact of tighter policy on slowing has been much less rapid than anticipated,

With early career roots in both equity derivatives and relative value fixed income, Lisa O’Connor is now the Co-CIO of Multi-Strategy Assets and Solutions at BlackRock. Here she oversees her team’s development and delivery of a long only, systematic asset allocation process on behalf of the firm’s clients.Our discussion first considers some of the lessons Lisa has derived from market risk cycles. In reflecting on vol episodes, she asserts that markets become very focused on relative value during times of crisis. That is, in higher risk environments, there’s much greater differentiation across risk categories, as investors evaluate which assets can truly be defensive or at least weather the storm.We talk next about the model portfolio process and the mix of quantitative and fundamental factors that drive the asset allocation decisions. In contemplating the role of duration as a portfolio ballast, Lisa is concerned about risk premia in the back-end of the curve as a function of fiscal deficits. Instead, she see

“Walking on a tightrope” is an idiom that conjures the notion of danger – of exceptionally little margin of safety and of particularly significantconsequences should things not go as planned. Markets feel this way - asset prices are full, Sharpe ratios high, correlations low, political polarization intensifying. In this discussion, we review the recent role of correlation in breaking the more than 500 day streak over which the S&P 500 failed to move down by 2% in one day. We also talk about out the highly unusual VIX curve, with some portions of it in contango and others in backwardation.Hope you enjoy it and find it useful.

If smoothing returns is the feature not bug of private equity and credit, what strategy fully embraces the virtue of honest mark to market risk?  What strategy highlights price shocks and the resulting level at which a portfolio could be unwound in a hurry as the basis of thinking about its efficacy?  In this short podcast, I make the case that exposure to vol – to the anti-fragile - is going to be a part of this strategy. That is, long exposure to options-based insurance.I hope you enjoy and find this useful. As always, I appreciate your feedback.

A Wall Street economist who served institutional clients at both Lehman Brothers and Bank of America, Michelle Meyer, transitioned to Mastercard two and a half years ago, now serving as the firm’s Chief Economist and Head of the Mastercard Economics Institute. I had the opportunity to catch up with Michelle back in May and while much has of course happened in the world since, there are some valuable insights shared in our discussion.We first survey the similarities and differences in her new role at Mastercard versus the traditional sell-side economics role in which she served. Here, she says that in terms of process, markets were formerly the output but are now more of an input that informs her thinking on longer horizon economic trends and their implications. The audience, of course, is different as well, and hedge funds eager for insights on the most recent econ data release are not the priority they once were.We spend the bulk of our conversation on the vast and rich data set of transactions being generat

It’s been 25 years since Mark Cuban implemented an exceedingly well-timed and attractively priced hedge on shares of Yahoo.  In this short podcast, we review the popular “zero cost collar” trade and discuss the factors that impact its pricing. Cuban is known for playing offense in investing, buying the Mavs and making deals on the Tank. But his defensive trade on Yahoo years ago has been critical in his wealth accumulation. We bring in Jensen Huang, the owner of a few shares of NVDA, and make the case that he ought to consider this risk reducing collar transaction. I hope you find the discussion informative.  Feedback is welcome.

There’s been some decent ink spilled recently on the “dispersion trade” which has profited from the epically low level of realized correlation among stocks. If winning trades attract capital and erode the margin of safety in the process, is this exposure crowded and vulnerable to an unwind?  In this short pod, I lay out a 5-part, informal framework for thinking about risk-off episodes. In the process, we consider the pricing of vol and correlation. While the spill-over risk from dispersion trades gone wrong doesn’t appear to be high, the pricing of index volatility that results from never seen before levels of implied correlation offers a uniquely attractive cost of macro insurance.I hope you enjoy and find this useful.

Earning a Ph.D. in financial economics is no small feat. And not only did Garrett DeSimone do just that, but he would unknowingly embark on his future career in the process of doing so. His dissertation from the University of Delaware involved the study of event risk premia in single stocks ahead of earnings. And to perform the analysis he engaged with OptionMetrics, a firm specializing in implied volatility data. Now the Head of Quantitative Research there, Garrett leads the firm’s efforts to deliver carefully constructed data sets to its client base, while generating original empirical studies of option pricing and trading strategies. Our discussion considers some of his work, starting with his dissertation and the finding that the earnings event risk premium for single stocks makes straddles punitive to own. We liken this to a more recent phenomenon at the index level – the inflated one-day S&P 500 implied vol levels that have occurred in days before 3 macro events – the CPI, the Nonfarm payrolls repor

The study of correlation is valuable, informative and, likely an over-indulged in activity on Wall Street. That said, there are important risk considerations when it comes to how significantly assets move together or do not. The task at hand in this short podcast is to illustrate and contemplate the diverging paths of two important correlations: that between the stock market and bond market and second, between equities themselves. If the stock market is diversifying itself in real-time, there are reasons to think it cannot last indefinitely.  I hope you enjoy.

With option prices in the doldrums, your host provides some thoughts on why and in the process reflects on the skinny levels of risk premia a decade ago. I finish with some cautionary observations around what might go wrong. I hope you enjoy this short pod!

It was a pleasure to welcome Raghuram Rajan back to the Alpha Exchange. Raghu is currently a distinguished professor at the Chicago Booth School of Business and is the former head of the Reserve Bank of India. With a deep understanding of the intersection of markets, the economy and policymaking, he is among the most important voices on Central Banking.With this in mind, our discussion explores his recent book “Monetary Policy and Its Unintended Consequences”, the title alone of which is entirely through provoking. Raghu shares his assessment of the tendency for policy towards increasing asymmetry – where the Fed acts as a lender of last resort during a crisis but finds itself unable to achieve normalization during non-stress periods. We talk as well about the distortions that result from forward guidance and asset purchase programs during non-emergency periods.Lastly, we talk about policy spill-overs, specifically the impact that the Fed’s actions can have on emerging economies. As head of the RBI a decade a

Corporate Fraud is an unfortunate, costly and seemingly never-ending aspect of the world of business. In the best case, fraud is prevented or, at least caught before harm is done. All too often, however, these cases of deception lead to large financial losses, impacting the lives of many - shareholders, individuals and certainly those that are courageous whistleblowers.A little more than 15 years after the unwind of the Madoff Ponzi scheme, I invited Harry Markopolos back to the Alpha Exchange. Harry is often simply referred to as “the Man Who Knew”. He chased Madoff for years, serving up a comprehensive slew of evidence to the SEC that was mind boggling in its degree of logic, rigor and scope. Our conversation looks back on the lessons of this Ponzi scheme and also zooms out to consider other examples of corporate fraud including Theranos and FTX. Throughout our discussion I seek to gather Harry’s insights on the commonalities in these cases, how to detect them and also, importantly, how to prevent fraud. He

It was a pleasure to welcome Kris Kumar, CIO of Goose Hollow Capital, to the Alpha Exchange. Our conversation starts with Fed policy and the manner in which the 500bps of policy tightening is impacting the economy. To this, Kris argues that the propitious starting position for households and corporates in this cycle has been quite different than in previous ones, thus blunting the impact of rate hikes. He points as well to loose fiscal policy with the unemployment rate so low. For Kris, what happens next depends more on fiscal than monetary side.We next consider the backdrop for valuations, starting with fixed income. Kris sees safety that comes from a coupon on 2’s that approaches 5%, noting that there are positive real yields generally in most of the world.  From an earnings yield perspective, however, US equities have zero premium to bond yields and Kris points to the concentration of earnings growth coming from the top of the SPX, which, in turn, is a bet on generative AI.  Should this growth not material

The “rule of 72” tells us that a good approximation for the time it takes to double your money can be arrived at by taking 72 and dividing by the interest rate that capital can compound by on an annual basis. Implicit in the calculation is that the initial stack is left untouched and is not vulnerable to a drawdown. In this context, it was great to welcome Jerry Peters, the Managing Partner of Smithbrook to the Alpha Exchange. Providing a risk-managed equity solution to its high net worth clients, Jerry and team are focused on managing downside risk, utilizing an option overlay strategy to mitigate some of the invevitable swoons in equity prices.Our conversation walks through how index put options – when acquired at the right price – can create gains that help offset portfolio losses during times of stress. Acknowledging that the long term expected value of buying insurance ought to be negative, Jerry walks through how a protective strategy can interact with long risk exposure to create long term return enhan

After a 13-year career at CSFB where she would ultimately head the firm’s equity derivative strategy effort, in 2023 Mandy Xu moved to the CBOE where she’s now Head of Derivatives Market Intelligence and swimming in interesting, complex data sets. Our conversation surveys product innovation, going back to the first option trade ever on the CBOE, call options on July 1973 Xerox, through today’s vastly electronified ecosystem of trading in cross-asset risk exposures.We briefly review the unbelievable short squeeze in GME from 2021, and here Mandy asserts that today’s exposures are considerably more balanced than the Meme episode in which the retail stampede engorged on call option premium. Our discussion moves to the present-day backdrop for option pricing and the potential impact of mechanical flows resulting from vol being bought and sold in the market.Noting the substantial increase in AuM for overwriting and option income generating funds in both the mutual fund and ETF complex, Mandy is skeptical that this

Kieran Goodwin’s roots go back to the early days of both distressed debt investing and the credit default swap market, two classes of risk he has seen experience significant change over the last 25 years. Our conversation gets underway by exploring the notion of alpha decay in the distressed market, a diminishing opportunity set that has resulted from smarter capital entering the space, equipped with an understanding of the often complicated process around bankruptcy and reorganization. Kieran frames out the option characteristics of distressed investing in an interesting way, suggesting that the short or long profile of the exposure is about whether time is on your side or not while also arguing that it is arming yourself with a margin of safety in price that creates this runway, leaving the trade with more long vol attributes.Distressed investing today, in Kieran’s view, is an adult swim only business, rife with creditor-on-creditor violence and requiring a large balance sheet to be in the room as indenture

In Lori Calvasina's role as Head of US Equity Strategy at RBC Capital Markets, assessing the interaction between macro variables like rates with top-down factors like the equity market multiple is critical. But important as well is an evaluation of markets from the bottoms up. And here, she not only seeks to pull together the views of colleagues doing strategy work in sector verticals, but also to actually read earning transcripts during reporting season to get a sense of what companies are saying. Her broad assessment of the outlook for corporate America is generally optimistic as she sees companies having come out of multiple stress exercises - trade wars, the Covid shock, and the inflation and monetary policy response in the Pandemic's aftermath among them - with a stronger defensive plan. Companies are harnessing technology and managing costs more effectively, leaving them less likely to be forced to reduce headcount. The result is a consumer holding up quite well.Our discussion touches on the Mag7 and ho

George Orwell once said that writing a book is a “horrible, exhausting experience…that one would never undertake if one were not driven by some demon whom one can neither resist nor understand”.  Ok then. Let’s all agree that writing a book is a heavy lift. Let’s also agree that the personal finance advice industry is littered with gurus making outlandish statements about profit opportunities and often giving unsound advice on wealth management.With these in mind, it was a pleasure to welcome Jared Dillan back to the Alpha Exchange. Jared is the Founder and Editor of the Daily Dirtnap and the author of a recent book, “No Worries: How to Live a Stress-free Financial Life”. While many of the podcast discussions are in the weeds on high finance topics like monetary policy, hedging and correlation, my conversation with Jared emphasizes the basics: how to get the big decisions right and, in the process, enjoy more peace of mind. The foundations of our discussion are debt and risk, the two main sources of financial

Our final segment of 25 Sayings on Vol and Risk is upon us, and with it, 5 fresh pithy principles that I often turn to in trying to make sense of this chaotic sport we call markets. Along the way, in typing out these more than 20,000 words over the series, I’m probably out more than 50 dollars in espresso inspired drinks from Starbucks lead by the dirty chai latte and the caramel machiatto. But I’ve learned some stuff and had some fun and I hope you have as well.Sayings 21 through 25 are… “When I see a bubble forming, I rush in to buy.” (George Soros) “Vol is the only anti-fragile asset.” “When financial markets implode, convexity can be found lurking at the scene.” (Harley Bassman) “The correlation of vol and the vol of correlation are not your friend.” “Vol has memory, vol mean reverts.” Hope you Enjoy!

The task at hand is simple….make further progress on our 25 Sayings on Vol and Risk. I’ve certainly had some fun with the first 15. Somehow, in the context of this exploration of market risk philosophy, I’ve managed to quote both former President Ronald Reagan and Seinfeld hack comedian Kenny Bannia, summoned the wisdom of Wolf of Wall Street’s Mark Hannah and referenced both Morgan Stanley’s James Gorman and Optionseller.com’s James Cormier.  My promise remains to get you in and out in under 30 minutes, less time than an episode of Curb Your Enthusiasm.Sayings 16 through 20 are… “The money money makes, makes more money.” (Ben Franklin) “ROMO is the risk of missing out.” “Risk-on and risk-off are curious cousins.” “Accident-free finance promotes the selling of accident insurance.” “Price is the only fundamental.”  (Someone)