Alpha Exchange

As the economic collapse associated with the pandemic enters its second month, it was my distinct pleasure to have Howard Marks, the founder of Oaktree Capital, on the Alpha Exchange. A highly successful investor across many decades, Howard has prudently managed risk through a vast number of market cycles. His assessment of the complex mix of economic, financial and monetary aspects of the coronavirus crisis provides context for factors at work in market prices. A buyer of quickly cheapening assets in the middle two weeks of March, Howard sees a less compelling case on the long side now given the severity of the shock and the challenges to be faced in returning to a full speed economy. Please enjoy this episode of the Alpha Exchange, my conversation with Howard Marks.

As markets continue to grapple with the vast uncertainty resulting from the corona virus, it was excellent to have Peter van Dooijeweert, the Head of Institutional Hedging and Portfolio Solutions at Man Group, as a guest on the Alpha Exchange.  Our “crisis series” is aimed at uncovering the unique elements of the 2020 vol event, the extent to which systematic strategies acted as amplifiers on the way down and the lessons learned from being long or short optionality.  Addressing these questions, Peter has many insights to offer.  As a market participant with 25 years of investing experience, he views volatility cycles as self-reinforcing on the way up and down. I enjoyed hearing his views on the clues from correlation break-downs, the usefulness of a blended, cross-asset approach to hedging and a risk management framework that uses volatility scaling.  I hope you do as well.  Thanks for listening and please be well.

On this special crisis series episode of the Alpha Exchange, I had the opportunity to solicit the insights of Chris Cole, the founder and CIO of Artemis Capital.  Through a framework that gives much weight to the impact of financial products and the risk-taking built around them, Chris has a unique understanding of both low and high periods of volatility and the linkages between them.  In a paper authored in October 2017, Chris stated, "The markets are not correctly assessing the probability that volatility reaches new all-time lows in the short term (VIX80 in 2018-2020)".  Incredibly, he was right on both counts as the VIX dipped below 9 in December of 2017 and recently reached a new all-time high of 83, eclipsing the previous record level from the GFC.  He explains his thesis, shares his research on an optimal portfolio, his views on buying options at high prices, and looks forward to what could be several years of a new, much higher volatility regime.  This conversation gave me a great deal to think about,

As the special Crisis Series within the Alpha Exchange continues, it was a pleasure to catch up with former colleague, George Goncalves.  A 20 year veteran on both the buy-side and sell-side, George most recently led the Fixed Income Strategy effort at Nomura Securities. Our discussion considers the post GFC regulatory landscape that emerged in the US Treasury market and how, over time, the Street’s capacity to bear risk was compromised even as the government’s appetite to run larger deficits grew.  George walks through how we got to September of 2019, when repo market disruption fired a loud warning shot that market plumbing was vulnerable to crack. The increased prominence of the relative value investor, whose strategies are short liquidity and volatility, has figured prominently in the breathtaking explosion of volatility in the risk-free complex and the resulting role the Fed has needed to play to support market functioning.  Looking forward, George sees the potential that rates are headed lower still, bu

Our crisis series within the Alpha Exchange podcast continues and it was my pleasure to solicit the insights of Eric Peters, the founder and CIO of One River Asset Management.  To be sure, this isn’t Eric’s first experience managing capital through a crisis, but in his words, “this is a unique one…amplified by a whole range of things including big flows into vol selling programs.”  Seven percent return hurdles for pension plans, very low rates and the longest continuous economic expansion on record have all been complicit in a setup that was increasingly vulnerable.  In Eric’s rendering, this is a much more concerning shock than the GFC given the global nature of the economic sudden stop. We talk as well about the liquidation dynamics that emerged in the Treasury market and risk taking going forward in an environment in which the entirety of the yield curve may be pulled lower still. Thank you for listening and please be well.

Welcome to the second episode in our special Alpha Exchange series focused specifically on the 2020 economic and financial crisis.  It was my pleasure to have Vineer Bhansali, the founder and CIO of Long Tail Alpha, back on the podcast and hear his framing of the conditions that gave rise to so substantial an asset price sell-off in so short a period of time.  Calling the markets the most illiquid he has experienced in his thirty year career, Vineer cites the “sand pile effect” in describing the devastation to asset prices.  Colloquially speaking, Covid19 is simply the straw that broke the camel’s back after years and years of accumulated carry trades. Vineer’s insights on the manner in which the system of risk taking may now be set to interact with the economic fundamentals in a negatively reinforcing manner is critical to appreciate.  Thank you for listening

Welcome to the first in a special series of the Alpha Exchange in which the 2020 economic and financial crisis is the specific focus.  Amidst this protracted dislocation in markets, I am pleased to have Benn Eifert, the founder and CIO of QVR Advisors, share his views on the factors at work within the equity derivatives market and the important drivers of option prices.  Benn’s insights on positioning in both vanilla and complex OTC products, his knowledge of the landscape of risk transfer trades that experienced substantial growth in recent years and his expertise in the surface of equity index volatility are all highly relevant in an environment of explosive daily moves in both the S&P 500 and implied volatility itself.  Thank you for listening.

The price of vol, in single stocks, in equity sectors and across asset classes is on the mind of Stuart Kaiser. Now the head of equity derivatives research at UBS, Stuart spends his time helping the firm’s institutional clients find value on both the long and short side of the derivatives market. Landing at Goldman Sachs a stone's throw away from the global financial crisis, Stuart developed his skill set by looking for opportunities in the single stock options market at a time of massive transition in implied volatility. During our conversation, we revisit the surge in option premia in US financials, from extremely low to unrecognizably high levels in a matter of a year.  In this context, Stuart shares his views on the vol risk premia, noting that it can sometimes be compelling to sell vol at low levels, especially when markets are trending in muted fashion as they did in 2017. As part of his process for supporting clients, Stuart continuously evaluates volatility surfaces.  He shares the process he uses, de

When it comes to equity derivatives, few individuals have traded more options than John Succo.  Across a career in markets spanning more than 3 decades, John has managed convexity risk on both the sell-side and buy-side, through high and low vol periods and across single stock and index options.  During the course of our discussion, John shares many rich stories.  He brings to life the early days of career – one in which option pricing inefficiencies were significant across both strike and time.  He describes one of the large, early hedging trades he orchestrated in 1989 – a collar on S&P 500 shortly before the UAL mini-crash in October.  And he has plenty to say about the spectacular blow-up of LTCM, an outcome that surprised him very little.  A theme throughout our conversation is John’s careful attention to sizing positions and his overall objective of remaining long gamma.  While the lean periods for volatility make this challenging, John successfully managed decay through active position management,

Managing portfolios over the course of two decades, Mike Green has developed a unique framework for assessing risk and opportunity.  Trained in his early days to perform equity valuation, Mike came on the scene just as the tech bubble was imploding and the massive discrepancy between growth and value was coming undone.  In a great seat to ride the small cap value wave during the post internet bubble, but pre-crisis period, Mike began to appreciate the force of market prices and their impact on behavior, narratives and how they become entangled in feedback loops.  Our conversation is a retrospective on these situations of co-dependency – between profits, psychology and the economy.  In this context we discuss left and right tail events – in valuations, in housing price appreciate and in events of extreme high and low implied and realized volatility.Mike’s insights on market structure bring to life the motivations and market frictions that ultimately give rise to a transaction.  Price, in his rendering, is less

The son of a physician and with a penchant for math, Andy Redleaf came upon options in high school, even before they were listed on the CBOE.  Post college, Andy landed in an option trading role and was making markets on the CBOE during the 1987 stock market crash. In his rendering, the introduction of stock index futures dramatically increased correlation among stocks and the creation of portfolio insurance left some investors short a put that no other investors were long.  In combination, this left the market vulnerable to such a sharp one day plunge in stock prices.  Our conversation considers market stress periods in the context of the neat mathematical models and their simplifying assumptions that may be enablers of these seismic events.We talk as well about Andy’s hedge fund career, first co-founding Deephaven and then founding Whitebox.  Both ventures were focused on exploiting mispricings in complex securities such as convertible bonds and the relative value between equity and corporate credit securit

In 1998, Scott Ladner hit the derivatives scene at First Union, just as LTCM was imploding and equity volatility was rocketing higher.  No sooner would the Fed help contain that risk episode, then the tech bubble would be set in motion.  An intense period of “stocks up, vol up”  during which valuations expanded to unheard of levels, followed by an equally intense, “stocks down, vol up” characterized the period of 1999 through 2001 and provided hands on, sometimes painful experiences for Scott in managing convexity risk.  Short airline volatility during the September 11th terrorist attack, Scott quickly came to appreciate the potential for significant gap risk and discontinuity in markets, a reality not contemplated in the textbook version of Black Scholes.My conversation with Scott considers insights gathered over a career managing volatility exposure across asset classes and how he came to his role as CIO of Horizon Investments.  Scott shares his views on how volatility can come and go, how many factors can

A nearly 30 year career has given Jon Havice exposure to just about every strategy across the spectrum of asset markets. A freshly minted Wharton graduate with a major in engineering, Jon came upon O’Connor Associates in the early 1990’s where he cut his teeth trading listed currency option markets. Pre-euro, Jon would experience seminal FX vol events like the ERM unwind,Tequila crisis and Asian contagion in short order, gaining an appreciation for the impact of positioning on currency vol surfaces.As his career progressed, Jon would manage the gamut of arbitrage strategies, focusing on exotic options, convertible bonds, capital structure and muni bonds and dispersion. Our discussion brings to life the lessons to be had from trading through market crisis periods, including the importance of counterparty risk and the degree to which asset prices can stray from fundamental value. We also dive into the vol risk premium, exploring its attributes and how it has evolved over the years in light of the heavy hand of

Earning his chops as a macro economist on the sell-side, Alberto Gallo has seen the pendulum of risk swing from extreme fear to euphoria.  During his tenure at Goldman Sachs and then at RBS where he ran the Global Macro Credit Research product, Alberto provided buy-side clients with key insights on seminal volatility events like the Global Financial Crisis and the Eurozone Sovereign debt crisis.  Now, as a Partner at Algebris Investments, Alberto leads the firm’s Macro Strategy effort, a credit-oriented portfolio designed to navigate the ever tricky terrain of present-day markets. Our conversation considers portfolio construction in a world starved of yield, of low cross-asset risk premia, and one in which the potential for more drastic policy response may be on the horizon.  Alberto’s views on today’s regime of monetary policy point to the side effects that result from negative rates, as the banking system suffers, and investors are deprived of income. On the changing nature of volatility in markets, Alberto

In 1999, as a new century was nearly upon us, the Euro was born and the US tech bubble was in full sway, Louis Gave hung a shingle to start an independent research firm with his father, Charles. Twenty years later, Louis remains CEO of Gavekal, a firm that has helped institutional clients distill global market risk throughout different cycles. Our conversation focuses a good deal on China, an economy that Gavekal has carefully studied. Calling China the biggest macro story the world has ever seen, Louis and his team have had a front row seat on the economic transformation in China and the manner in which 400 million citizens have been lifted out of poverty. Through our discussion, we learn more about how China interacts with the global economy and specifically the stabilizing role that the country played during the financial crisis,  as well as during the growth recessions of 2012 and 2016. Our conversation also focuses a good deal on inflation. Amidst the well-worn narrative that inflation shortfall is a glo

Fascinated by markets at a very young age, Ben Melkman has spent his investing career thinking through the intersection of politics, macroeconomics and the price of options.  After earning a degree from the London School of Economics, Ben hit the FX desk at Morgan Stanley, quickly establishing himself as an invaluable resource for the largest macro hedge funds who sought his counsel on how best to structure trades in light of vol surfaces on offer across asset markets.  After a highly successful run at Brevan Howard, Ben established Light Sky Macro in 2016.  Our conversation is about large vol events.  With respect to the Global Financial Crisis, Ben dove into the complexities of credit derivative markets, concluding that the price of insurance was outlandishly cheap relative to the actual risks and the potential for contagion.  In our discussion, Ben makes highly insightful points around the inherent risks of over-reliance on modeling, the degree to which correlation assumptions can lead to gross underestima

In the mid 1980's, and recently graduated from Marquette University, a young Jim Bianco scored an accidental meeting for a position with First Boston. Most fortuitously, his resume wound up in the wrong pile, leading him to be mistakenly invited in to interview for a spot supporting a senior analyst. As luck would have it, Jim got the job and so was launched a more than 30 year career in markets. In 1998, amidst the chaos that was LTCM, Jim boldly launch his own firm. And more than two decades later, Bianco Research continues to provide differentiated advice on markets, Central Banks and the economy to its clients.My discussion with Jim focuses on monetary policy, global disinflation and the unholy impact of negative rates on the banking system. Jim’s perspective on the big picture, slow moving yet powerful forces of demographics illustrates how the excess of global savings leads to greater demand for safe fixed income assets. He points as well to the downward pressure on prices due to technological advanceme

On this episode of the Alpha Exchange, it was my distinct privilege to be joined by Glenn Stevens who resided over the Reserve Bank of Australia as Governor from 2006 to 2016. Considered one of the most gifted Central Bankers of our time, Glenn successfully navigated Australia’s economy through the crisis without a recession. A 36 year career at the RBA has imparted him with an appreciation for the inherent challenges in economic forecasting and in this context, we touch on Glenn's decision to tighten in early 2008 as inflation in Australia rose, only to sharply reverse course a few months later as the Global Financial Crisis began. Our conversation is a retrospective on the fast moving, unnerving time that was the GFC, a period that demanded and benefited from policymaker coordination. In Glenn’s view, the interconnected nature of markets and the economy during the crisis also forced Central Banks to view asset prices in a more endogenous light, assigning more weight to the impact of financial conditions on

The onslaught of Tweets regularly lobbed at Fed Chairman Powell assumes at least some part of the mosaic of today’s unique and vibrant risk climate.  But is Trump much different from previous Fed Chairs?  In “The Myth of Independence”, Sarah Binder and Mark Spindel provide an important account of the political history of the Fed.  And in this episode of the Alpha Exchange, it was a pleasure to have Mark, the Founder and CIO of Potomac River Capital, share his expert views on this subject as well as the macro environment in which Central Banks operate today.  Our conversation considers historical market stress events including the square off between Soros and the BoE, the Fed’s surprise tightening in 1994 and, of course the Great Financial Crisis.Mark also provides valuable perspective on the early days of the Fed, from its post-panic creation in 1912 through the onset of WWI, the high inflation volatility of the 1920’s, and then of course the 1929 crash and Great Depression.  Our conversation helps frame the

Nancy Davis, founder of Quadratic Capital, has spent her entire career trading options of all shapes and sizes and across all of the asset classes. She’s traded them listed, OTC, vanilla and complex in rates, FX, commodities, credit and equities. Over the course of nearly 20 years, Nancy has developed important perspective on risk cycles, trading through the dotcom era, the GFC, the 2011 sovereign crisis, the 2016 Brexit referendum and, more recently, the VIX unwind event of early 2018. Over these risk episodes and the quiet periods in between them, Nancy has developed a philosophy on utilizing optionality as a core vehicle to implement long or short directional exposure. Our conversation explores the fundamental question – “are options a good deal or not?” in light of the demonstrated premium of implied to realized volatility over time set against the numerous options blow-ups that have occurred in markets. As a prominent woman in the derivatives space, I also seek Nancy’s views on the state of female repres