Cover the kid’s ears… because we’re going back to our WTF format to ask what the actual Fingazi is going over in the UK with the bank of England raising rates, then buying a bunch of Gilts to save their pensions. The headlines say it’s some new-fangled LDI concept which led these pensions into trouble. But our guest this week, Zed Francis of Convexitas, says not so fast… the LDI actually is fine – and it was the reach for yield and adding some longer duration via derivatives which likely caused most of the problems.
Zed used to work at Legal & General – which sounds like a UK pub to us, but had a solutions group which created some of these LDI frameworks, so Zed’s in contact with some of the guys on the front lines during this shake-out. US pensions also use an LDI framework…is it coming for them too? What are the main differences between US and UK? Is duration the same as volatility in these cases? Are these pensions sort of short gamma? And of course, while we had him, why is some stuff (gamma) working in the Vol space when a lot of popular VIX/Vega based models aren’t. SEND IT!
Chapters:
00:00-02:37 = Intro
02:38-17:20 = Pension Differences US vs UK
17:21-34:15 = Where does the risk show up, Duration & waterfall events
34:16-43:57 = Leverage: Keeping the drawer closed
43:58-55:42 = Where do Derivatives come in & how to plug the hole
55:43-01:02:02 = Struggles in Vol Strategies
01:02:03-01:11:09 = How Vol has changed
Follow along with Convexitas on Twitter @convexitas and for more information visit their website at convexitas.com
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