Andrew Lapthorne, Global Head of Quantitative Research, Societe Generale
Nov 22, 2021
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Andrew Lapthorne, Global Head of Quantitative Research at Societe Generale, shares his insights from 25 years in finance, focusing on market price analysis and risk management. He reflects on pivotal moments, like the late '90s tech bubble and the lessons from the global financial crisis. Andrew advocates for innovative hedging strategies amidst rising inflation, suggesting that certain equities can act as effective buffers against bond risks. His deep understanding of market cycles and volatility provides valuable guidance for modern investors navigating today’s economic landscape.
Andrew Lapthorne emphasizes the significance of understanding historical market volatility to improve risk management strategies in finance.
He advocates for using commodity-sensitive equities as a hedge against inflation, promoting a shift in investment strategies for current economic conditions.
Deep dives
The Foundations of Quantitative Analysis
Andrew Lapthorne's career in finance began in the mid-1990s, marked by a focus on combining quantitative methods with macroeconomic indicators. His early experiences involved creating market performance reports and learning the intricacies of financial analysis, which laid the groundwork for his future role as the Global Head of Quantitative Research at Societe Generale. Inspired by influential thinkers like Albert Edwards, he developed an understanding of how significant global events—such as the Asian financial crisis—could drive deflationary trends and volatility, highlighting the interconnectedness of markets. This early exposure to unconventional macroeconomic thinking ultimately shaped his framework for identifying, managing, and hedging risk in financial markets.
Lessons from Market Volatility Crises
Lapthorne emphasizes the importance of historical market volatility events in shaping risk management strategies. He explores major crises, including the global financial crisis and the Eurozone sovereign debt crisis, noting how they demonstrated the relationship between market prices and financial policymaking. He argues that understanding the concept of 'Merton distance to default' is crucial for equity investors, as it captures the evolving risk landscape and potential for credit crises. By studying past market episodes, Lapthorne seeks to anticipate and mitigate risks associated with rising volatility and shifts in monetary policy dynamics.
Inflation and Hedging Strategies
The podcast delves into the current inflationary pressures impacting asset classes, indicating that equity and bond markets may respond to inflation in a more correlated manner than in the past. Lapthorne suggests that investors should consider equities that are sensitive to commodity prices as a hedge against inflation, showing how certain sectors can outperform in such environments. He introduces the idea of an index reflecting inflation-beating stocks, which comprises companies that typically thrive in inflationary cycles, illustrating the shift in investment strategies required in the current economic context. This approach aims to create diversified portfolios that can withstand inflation risks by incorporating cyclical equities while managing traditional bond holdings.
Challenges in the Current Market Environment
Lapthorne identifies significant challenges facing investors today, particularly regarding high levels of corporate debt and the disconnection between bond yields and inflation expectations. He discusses how forced demand for bonds may distort traditional relationships between asset classes and contribute to potential market dislocations. This scenario raises concerns about how quickly monetary policies can tighten without destabilizing the current market structures that have been bolstered by quantitative easing. He highlights the risk of concentration in the S&P 500, where a few large firms disproportionately influence market performance, underlining the vulnerability of the overall market should those firms face setbacks due to changing economic conditions.
Now the Global Head of Quantitative Research at Soc Gen, Andrew Lapthorne got an early taste in unconventional macro thinking from the likes of Albert Edwards and James Montier. Over a career spanning 25 years, Andrew has engaged in the study of market prices, seeking understanding in their levels and volatilities both on an absolute and relative basis. Out of this work comes a framework for helping investors identify, capture and defend against risk exposures. Our conversation considers some of the market vol episodes most formative to Andrew’s process. And here we travel all they way back to the late 1990’s when, post the Asian crisis, disinflation began to travel around the world, depressing bond yields and leading to increasingly active Central Banks. The result, a tech bubble and substantial de-rating of all assets cyclical. The GFC was, unsurprisingly, greatly instructive for Andrew as well, helping him appreciate the Merton “distance to default” risk that equity investors are subject to. In the balance of our discussion, we consider the here and now and learn of the work that Andrew and his team are doing for clients seeking refuge from inflation. In this context, he’s suggested that bond investors use “dangerous equity to hedge safe bonds”, an idea that identifies certain stocks, like those driven by an underlying commodity, as performing strongly during inflationary periods. I hope you enjoy this episode of the Alpha Exchange, my conversation with Andrew Lapthorne.
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