Alpha Exchange

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 the utilization of OTC derivatives. In this context, Simplify has created a ground-breaking product that seeks to hedge interest rate risk for end users, work developed by derivatives pioneer Harley Bassman. In an environment in which fiscal and monetary policy are acting powerfully in tandem, such a product can easily prove critical to defending the potential inflation that may already be surfacing. Lastly, Paul and I touch on the fast moving world of cryptocurrencies and how his firm is thinking about giving investors access to this new asset class and the potentially diversifying role it may serve in a portfolio. I hope you enjoy this episode of the Alpha Exchange, my conversation with Paul Kim.

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 episodes of significant volatility during which investor demand for liquid and transparent macro assets surged. Our conversation next considers the business coordination required among Samara’s team members to support the roughly 800 ETFs offered by BlackRock. Central to running a business at such scale has been substantial investment in technology and automation and these proved especially critical during the market crisis of 2020. It was during this incredible surge in volatility – both in the stock market and bond market – that investors utilized ETFs for price discovery and risk transfer in tremendous size. Lastly, we spend time on the people aspect of the business, a topic on which Samara is particularly passionate. She is proud that her team of investment managers within the engine is mostly women and plays an active role in the discussion among leadership around BlackRock’s commitment to a broadening the racial and ethnic make-up of the firm. In addition to being strongly motivated by efforts to increase inclusion, Samara looks forward and is genuinely excited about the prospect of bringing hundreds of millions more people into the markets and investing.  I hope you enjoy this episode of the Alpha Exchange, my discussion with Samara Cohen.

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 example, Rob bought vol on the Brazil Yen cross, a pair in which hedge funds had piled into in order to earn the sizable interest rate differential. While difficult to carry, the market ruptures that materialized late summer as the Quant Quake went into full sway made this trade highly profitable.  We speak as well about taking in as many data points across the asset classes for clues as to what might sponsor the next risk event, a strategy Rob executed by roaming on different floors to get a feel for what colleagues were up to.  Today, Rob is co-head of global trading and head of derivatives trading at Galaxy Digital, a firm focused on various businesses in the crypto landscape. In his role of pricing options on digital assets such as Bitcoin and Ethereum, Rob has plenty to say about these interesting vol surfaces and the interaction of various actors who are net sellers or net buyers of volatility. In his view, derivatives market liquidity is steadily increasing and a virtuous cycle is in place. These products will become more important as the extraordinary thrust of Central Bank actions are creating a broad rethink of the fiat monetary system.  I really enjoyed this episode of the Alpha Exchange and hope you do as well. 

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 the risk recycling that has long operated alongside the structured products universe.  Here, depressed levels of index vol and skew in Asia encouraged hedge funds and asset managers to implement volatility relative value trades versus the S&P 500.  Lastly, we touch on Andrew’s new position at Bach Option, joining founder Miao-Dan Wu in building out a firm dedicated to understanding and trading volatility at a time of great change in markets and plenty of catalysts for the next volatility event.  I hope you enjoy my discussion with Andrew Scott. 

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 equity market segment with lofty valuations and for which higher interest rates appear a real headwind. But there is value out there and in EM, Erin sees cheap assets on both the FX and equity side. Dean closes the conversation by soliciting Erin’s views on the opportunity set for women in finance. Recently named to the highly prestigious list of Barron’s 100 Most Influential Women in Finance, Erin is in a great position to share her views. She sees lots of progress, with excellent efforts to support women at the junior level and more still to do at the mid-level segment of female career development. Please enjoy Dean’s discussion with Erin Browne.

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 active participant in the SPAC market, Dave sees plenty of opportunity here but argues that the entry price matters and believes it is better to be a buyer of unloved securities than part of a gold rush in which valuation is cast aside. Lastly, we explore Dave’s philosophy of tail risk hedging and how he utilizes both listed options and credit protection to defend the portfolio against the disruption events that have become a frequent reality in modern markets. I hope you enjoy this episode of the Alpha Exchange, my conversation with Dave Puritz.

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 into crypto, a space he has been involved in for more than 7 years.  His Osprey Funds has launched OBTC, an access vehicle for Bitcoin, that seeks to lower both the costs and challenges associated with gaining exposure.  About the crypto space broadly, Greg sees lots of opportunity to develop tradeable, ticker-based trust structures that provide access to various digital coins and tokens.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Greg King. 

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 assessing the changing buyer base in converts, from a market once dominated by arbitrage accounts to one in which long only capital has become a great proportion.  Lastly, we discuss portfolio construction in a world of low rates, active Central Banks and risks that originate from sources not previously contemplated.  In this context, Mark shares his thoughts on tail risk hedging, recognizing both its value and cost and preferring to keep it simple using listed options.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Mark Friedman. 

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 and demand for optionality in the equity market, Benn describes the losses that were imparted on short volatility strategies in March 2020 and how that figures in to a VIX that has been persistently high relative to the metrics it is typically related to.  Lastly, given that 2021 has demonstrated that stocks can actually crash up as well as crash down, we consider the implications of GameStop on the volatility surface.  Here Benn sees good reason to expect a persistent, extra premium to the upside call as a result of recent events.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Benn Eifert.

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 establish a cohesive culture. Here, Mark has strong views. In his rendering, good management is no surprises and being a source of feedback that is both consistent and fair, even if uncomfortable, is a critical deliverable of a leader. Lastly, I solicit Mark’s insights on diversity efforts on the Street. While certainly seeing progress over the course of his career, he also sees plenty of further opportunity to expand the presence of women and minorities in the field of finance. I hope you enjoy my conversation on leadership, culture and mentorship with Mark Miller.