Alpha Exchange

For the landscape of elevated asset prices that defines today, nothing may be more consequential than changes in the inflation outlook. And for Barry Knapp, the founder of Ironsides Macro, the Fed is off-track with respect to its understanding of inflation in a post-pandemic world. While the Covid shock brought market volatility comparable to the breathtaking levels experienced during the GFC, the inflation aftermath of these two crises could not be any different. In Barry’s rendering, while the GFC left household and financial sector balance sheets in disarray amid a damaged credit channel, consumer leverage is extremely low and lending is unimpaired in the post pandemic period. By crafting today’s policy as a function of the disinflationary decade post 2008, the Fed also fails to account for the positive supply shock in energy that was the Shale revolution as well as the decades long period of goods disinflation that resulted from China’s admission to the WTO.  The result, especially as supply chains are be

With a position in rate strategy at Salomon Brothers in the late 1990’s, Subadra Rajappa developed an early appreciation for how market risk can be transmitted from one part of the world to the other through the 1997 Asian FX crisis and the LTCM debacle a year later.  Over the course of a career spanning more than 25 years, she’s developed a macro framework that is underpinned by an assessment of growth and inflation variables that help drive interest rate fair value models. Derivative market pricing and fund flows also make their way into her framework.  Specifically, Subadra looks at the interest rate vol surface with special attention to the price of out of the money options, and, to track the money, keeps an eye on positioning in futures markets. Our conversation considers key recent events that shape where we are in the monetary policy cycle. In this context, Subadra shares her views on the integrity of market pricing signals amidst the large participation of the Fed in the market.  We also explore infla

If you asked yourself, “what are the odds?”, Denise Chisholm can probably tell you insofar as market outcomes are concerned. A Sector Strategist at Fidelity Investments, Denise leverages historical data as part of a probability framework that helps her evaluate risk and opportunity in the equity market. Our conversation explores episodes when her process uncovered overlooked relationships that were hiding in plain sight. During the GFC, for instance, Denise connected faltering housing prices with default implications on Country Wide’s mortgage portfolio. Her work on probability is sometimes multi-layered. For instance, in evaluating the reaction of the long end of the yield curve to Fed tightening cycles, Denise found that conditional on the Leading Economic Indicator Index falling the 10 year yield increased only 30% of the time when policy was tightened.More currently, we discuss what Denise sees in markets today. Here she observes a strong recovery in wages from the Covid bottom as correlated to outperform

For Jeff deGraaf, financial markets have always been about figuring out who moved the pieces in a chess match and why. Early exposure to the discipline of technical analysis and its focus on prices and probabilities helped Jeff begin to develop a framework that concentrates on finding bets with favorable odds. Our discussion considers the market events that have played a formative role in how Jeff thinks about risk. Particularly influential among the big risk-off events was the LTCM debacle, especially as it illustrated the power of the Fed to bring an end to a de-risking process.A decade after founding Renaissance Macro in 2011, Jeff and his team continue to view the policy response as both inevitable and critical and in this context, we discuss the evolution of the interaction between markets and the Central Bank. Today’s much more activist Fed is one example of how historical pricing relationships, while a valuable tool to understand the present, must be interpreted with care. The shifting correlation prof

Initially trained as a lawyer and consultant, Peter Cecchini's career spans a few decades across the buy side and sell side, focused on both bottoms up and top down analysis of risk and opportunity. Now the head of research and strategy at Axonic Capital, Peter shared his insights on the Merton model and the linkages between credit spreads, stocks prices and asset volatility. In the context of this discussion, we explore episodes of dislocation between equity and credit markets, how to spot them and the implementation of trades to capitalize on them. In Peter’s view, the better risk signal has traditionally emanated from the credit markets where bondholder obsession with being paid back dominated the sometimes lofty upside scenarios entertained by equity market investors. Over time, however, the degree to which the equity cushion has risen so markedly may lead to credit market complacency, leaving Peter sometimes more focused on stock price fluctuations as the cleaner risk signal.Our conversation, of course,

Few professionals have the depth of perspective on the many market risk events that were missed by the models as Rick Bookstaber. Trained at MIT where he received a PhD in economics, Rick would become Morgan Stanley’s first risk manager in 1984.  There, and also at Salomon brothers, Rick was among the quants on Wall Street that developed early pricing models for interest rate derivatives. In this capacity, he had intimate knowledge of the challenges that complex products created for dealers looking to hedge them.  And related to this, he also had a front row seat to the early debacles of modern markets including the crash in 1987 and the LTCM unwind in 1998.  Across two excellent books, Demon of Our Own Design and End of Theory, Rick explores the characteristics of markets that make them inherently fragile, including the notion of tight coupling.  Here, feedback between trading, price changes and subsequent trading based on the price changes can give rise to instability. Today, Rick is the founder of Fabric R

With many years experience trading and risk managing derivative exposures, Simon Ho is now the founder and CEO of T3 Index, a financial research and technology firm doing some interesting work in the arena of complex index and product construction.  An avid user of VIX products during his time on the buy-side, Simon loved everything about the CBOE suite of vol products but the cost to use them. He set out to create a similar, but more economical product that could compete for the growing user base of investors who sought direct exposure to volatility. With this, SPIKES was born and so too began the journey for Simon and his team to bring a new volatility option and futures product to the market.  Next, we explore the newest creation from T3, the BitVol index.  Recognizing the interest from investors in trading volatility directly, Simon sees promise in an index that gives end users direct access to implied volatility in Bitcoin. While exploring this, we discuss the characteristics of vol surfaces for assets l

Now the Global Head of Macro at Schonfeld Strategic Advisors, Colin Lancaster has always found top-down investing a fascinating discipline.  Trained as a lawyer but finding his way to the buy-side in the 1990’s, Colin has spent the last 25 years in markets, allocating capital and building teams focused on macro.  Over his long career, he’s traded through his share of vol events, each a challenging experience but also formative from a risk philosophy standpoint. Our conversation is a retrospective on the nature of risks that investors are forced to confront, how discontinuities in asset prices materialize and that ever elusive search for the positive carry hedge. Exploring seismic episodes of risk-off, we also spend time on the need to anticipate the inevitable and typically overwhelming response from the Central Bank and how, post both the GFC and now Pandemic, the Fed’s interventions have increasingly crowded out the integrity of market price signals.  Lastly, we spend time on Colin’s fast paced and insightf

From a young age and learning from his humble and hardworking parents who immigrated from South Korea, Paul Kim developed an appreciation for the value of capitalism and the pursuit of the American dream.  Finding his way into the investment industry first in an investment banking seat at Lazard where he learned by fire, Paul would ultimately spend time at PIMCO and then at Principal Global Investors where he launched and built the firm’s ETF business. More recently, Paul co-founded Simplify Asset Management, a firm committed to delivering innovative products in the exchange traded landscape. Our conversation is focused on how derivatives can be used within an ETF to augment the purely linear exposures provided by traditional instruments like the SPY. By overlaying a put option, for instance, an investor can protect against extreme downside risk in equities like that which materialized in March of 2020.  We discuss as well important and exciting new developments in the ETF industry, one of which allows for th

In the investment world, few if any products have experienced as much growth as the exchange traded fund. And within the ETF business, no firm is as large and as important as BlackRock. In this context, it was great to welcome Samara Cohen, Managing Director and Co-Head of EII Markets and Investments at BlackRock to the Alpha Exchange. Through our discussion, we learn of Samara’s start in the industry as employee 134 at BlackRock before attending business school and then spending 16 years in fixed income at Goldman Sachs. Here she developed a keen understanding of bond market plumbing and the implications of post GFC regulatory reforms for the design of future products. This focus on bond market structure strategy paved the way for her return to BlackRock in 2015. Samara shares with us some of the key milestones in the ETF business, including the electronification of bond market trading that came from the first fixed income ETF in 2002. Important as well for the ETF industry has been has been episodes of sign

If “theta is the rent on gamma,” for Robert Bogucki, trading options from the long side has always been worth the inevitable pain from carrying positions during benign periods in markets. Trained in mechanical and aerospace engineering, Rob made his way to Goldman Sachs at a time when the Street was just starting to take on individuals with math and physics background. Starting on the currency options desk at Goldman, Rob would spend time at Morgan Stanley and Merrill Lynch before ultimately leading the global macro trading desk at Barclays, running a large customer and proprietary FX options book.  Musing that a “bachelor’s degree in crowd psychology is worth more than a PhD in economics”, Rob stresses that modeling architecture like Black Scholes is important as a starting point for valuation, but we need to appreciate the limitations of models. We review a few fascinating risk events in FX derivatives that Rob traded through. Remembering how disrespected risk premium was in the early summer of 2007, for ex

After a 6 week hiatus during which I was recovering from a serious jet ski accident, I am excited to bring you a fresh episode of the Alpha Exchange.  And it was wonderful to spend time with Andrew Scott, a Partner and Head of Client Solutions at Bach Option.  Our conversation is an exploration into the complex factors that drive the clearing price for volatility in equity markets.  In this context, we spend no time on the economic cycle or corporate profits or the latest missive from the Fed.  Instead, Andrew explains how the vast industry of Asian structured products leaves banks with complex exposures to optionality, correlation and dividends.  These trades, designed to create income in countries like South Korean that have seen interest rates in secular decline, leave banks with substantial long vol positions.   Through our conversation, we learn of the concept of “peak vega”, an industry estimate for the level of the underlying index where bank’s are most long vega.  Andrew also lays out in great detail

On this episode of the Alpha Exchange, Dean had the pleasure of catching up with Erin Browne, a Portfolio Manager at PIMCO. Through their discussion, we learn of Erin’s introduction to the study of macro, a discipline she instantly found fascinating and has underpinned her more than 2 decades career in markets. At Moore Capital through the build-up and ultimate unwind of the US housing bubble, Erin provides perspective she gathered during the GFC, laying out the time spent on idea generation as well as efforts to optimize the trade construction. Because these shorts became so large, having a game plan on profit-taking also became an important consideration. The conversation also focuses on the 2020 Pandemic, and how Erin and her team successfully positioned portfolios at PIMCO through that volatility episode. Surveying the set of risks that comprise today’s investing landscape, Erin is focused on inflation and, importantly, the Fed’s reaction function to the data. She sees vulnerability in “spec tech”, that e

A quarter-century ago, as the original tech bubble began in earnest, the American Stock exchange was full of action. Populated with an aggressive throng of option traders, the Amex was a critical liquidity venue during a period of heady growth in the US listed options market. It was here, starting as a clerk, that Dave Puritz began to hone the craft that underpins his role today as founder and CIO of Shaolin Capital Management. Through our discussion, we learn of Dave’s sell-side experience, as a listed options trader at BofA and then as head of convertible bond trading at Deutsche Bank, and the lessons he gathered in balancing the facilitation of customer business with the management of proprietary positions. Much of our conversation centers on converts, an asset class in which Dave and Shaolin have gained prominence. Reflecting on the tremendous issuance already in 2021, Dave finds it important to assess the combination of high implied volatility and long duration associated with recent large deals. A very

Greg King has spent his career creating vehicles that enable investors to access complex risk exposures.  Part of the team from Barclays that designed the VXX ETP product in 2009, Greg went on to co-found Velocity Shares, a firm that was ultimately acquired by Janus and created both the TVIX and XIV, levered long and short versions of the VXX.  About the XIV, Greg shares his views on the manner in which the mechanical hedging requirements for inverse leveraged products can lead to a spiral in the price of the underlying asset.  Later, Greg would found Rex Shares, a platform that has brought a series of exchange-traded products to market.  Through our conversation, we hear Greg’s perspectives on the characteristics of products that attract considerable AuM versus the many that do not.  In this context, Greg believes that understanding the technicalities of how a product is built is important but so too is persistence and a little bit of luck.  We spent the balance of our discussion talking about Greg’s venture

For Mark Friedman, the Founder and CIO of DLD Asset Management, the convertible bond market has always made for interesting study.  Sitting at the intersection of critical asset classes, the convertible bond market requires investors to assess risk from many dimensions at once.  And with valuation components derived from equity, interest rate, credit and volatility risk, converts have provided Mark with plenty to analyze over nearly 3 decades in markets.  Our conversation is a retrospective on the evolution of this hybrid product – from Mark’s early days trading Asian convertibles in the mid 90’s to the high vol, crowded era of the early 2000’s, all the way to today.  Along the way in our discussion, we happen upon some of the important risk events in converts that Mark has traded through.  He highlights some of the ancillary risks that an investor assumes in a converts, specifically, borrow, dividends and a vol dampening take-over, and how the market has sought to address these.  We also spend some time asse

As founder and CIO of QVR Advisors, Benn Eifert spends his time looking for opportunities in volatility markets and helping his investors protect capital through periods of uncertainty. With the surge in volatility that has recently materialized in GameStop and a number of other stocks with high short interest, it was timely to have Benn back on the Alpha Exchange to share his always excellent insights on option market dynamics.  Our discussion considers the emergence of a factor that may have been hiding in plain sight – crowd sourced convexity that left option hedgers short gamma.  In the process of laying out this recent single stock risk event, Benn clarifies some of the misconceptions that may be common around the retail options trading community.  From Benn’s vantage point, some of these investors are hardly unsophisticated and understand leverage, positioning and the feedback loops that can occur when dealers are hedging options from the short side.  As we step back and consider the ecosystem of supply

We take things in a different direction on this episode of the Alpha Exchange and focus on the importance of leadership and culture at large financial institutions. With this in mind, it was my pleasure to solicit the insights of Mark Miller, a personal mentor of mine and a capital markets professional whose sell-side career has spanned 4 decades. Having served in the role of global head of sales at Citigroup, BofA and HSBC, Mark has led significant teams of professionals across product areas and geographies. In this context, we explore the challenges and opportunities inherent in bringing together a firm's resources on behalf of its client base. We also discuss the process for evaluating talent, and for Mark, the successful salesperson is highly competent in understanding market pricing dynamics and often has the capacity to be a trader. In conjunction with this, a salesperson's success is contingent on having earned the trust of her or his clients. We also talk about leadership and what it takes to establis

Mentored at Legg Mason under the tutelage of legendary investor Bill Miller, Samantha McLemore is a student of finding value in corporate equities.  Now the founder and managing member of Patient Capital Management, Samantha shares her perspectives developed over two decades and through several cycles of the value factor.  Our conversation is an exploration of Samantha’s framework, keenly focused on finding opportunity based on valuation and with a long horizon in mind.  In Samantha’s world, embracing out of favor securities allows capital to be put work when and where others are reluctant to and sets the stage for achieving long term excess returns.  In this context, she recounts her purchase of UBER during the early days of the 2020 lockdown, seeing potentially strong upside relative to what she deemed as manageable downside risk.  We talk more broadly about the underperformance of the value factor in recent years as Samantha notes that the high growth segments of the market are in demand in an environment

Working as an architect in the 1990’s, Tania Reif saw first hand the devastating impact on local communities of the currency crisis events that occurred with some frequency in her home country of Venezuela.  Gripped by the field of macroeconomics, Tania ultimately earned a PhD in economics from Columbia University, writing her dissertation on currency crises.  Our conversation brings to life Tania’s framework for the “why” of FX crisis events.  In this context, she shares her assessment of the multiple crisis events in the 1990’s, contrasting this today’s more stable emerging market FX environment.  Pointing to fixed exchange rate regimes, Tania describes the vulnerability that comes from a sudden stop of external financing after a period of excessively loose monetary policy.  The result, a balance of payments crisis that leads to a large currency depreciation and inflation shock.  We also discuss financial contagion and Tania makes the point that when countries have parallel risks, an event in one country ca