As our crisis series within the Alpha Exchange continues, it was a pleasure to catch up with Steven Englander, the head of G10 FX and North America Macro Strategy for Standard Chartered.  We review the fast moving aspect of the March dislocation and the manner in which pricing relationships typical of normal markets ceased to hold.  As many of our listeners are steeped in equity volatility, it was great to solicit Steven’s views on risk as expressed through FX.  His team’s work on the relative performance of haven versus carry currencies during the dark days of March illustrates the manner in which the crisis expressed itself – around the globe and across asset classes.   On the Fed, Steven has much to say, beginning with how the speed and degree of its policy response has exhibited a strong impact on asset prices as investors firmly shake hands with the Central Bank.  We talk as well about the outlook for inflation, the market’s capacity to absorb the coming tidal wave of US government debt and scenarios for the dollar.  I really enjoyed Steven’s perspective and hope you do as well.

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 (VIX<9 in 2017) and new all-time highs in the long term (VIX>80 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, and I hope it does for you as well.  Please be safe.

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, but, given the degree of government capital directed towards the economic sudden stop, ultimately see value in inflation protected securities like TIPS.  Thanks for listening and be safe.

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, describing how he utilizes back-tests and how he arrives at points on the curve that carry best and are optimal in the context of the risks being hedged.  We also discuss 2018, a year book-ended by market disruption events of very different character that required unique trade construction in hedging.  Lastly, Stuart shares his framework for evaluating cross-asset risk factors and how he looks for warning signs that sister asset classes like FX and rates may send to equity investors.  Today, amidst a challenging environment for carrying options, he sees value in gold volatility.  Please enjoy this episode of the Alpha Exchange, my discussion with Stuart Kaiser.

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, trading the range in volatility and offsetting some of the bleed from long single stock vol by selling index volatility.  The result was that his hedge fund, Vicis Capital, became looked upon by institutional allocators as a valuable  addition to a portfolio of generally correlated risk-assets.  The orthogonal nature of the return stream from Vicis was of great value for investors in the period leading into and through the financial crisis.  Today, John is a partner at SS Financial, and remains a keen and skeptical observer of markets.  On his mind mostly is debt and the view that it is the sudden stop of unsustainable leverage that usually figures complicit in big vol events.  Please enjoy this episode of the Alpha Exchange, my conversation with John Succo.