Alpha Exchange

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. 

Managing portfolios over the course of two decades, Mike Green has developed a unique framework for assessing risk and opportunity.  Trained in his early days to perform equity valuation, Mike came on the scene just as the tech bubble was imploding and the massive discrepancy between growth and value was coming undone.  In a great seat to ride the small cap value wave during the post internet bubble, but pre-crisis period, Mike began to appreciate the force of market prices and their impact on behavior, narratives and how they become entangled in feedback loops.  Our conversation is a retrospective on these situations of co-dependency – between profits, psychology and the economy.  In this context we discuss left and right tail events – in valuations, in housing price appreciate and in events of extreme high and low implied and realized volatility.Mike’s insights on market structure bring to life the motivations and market frictions that ultimately give rise to a transaction.  Price, in his rendering, is less about valuation and more about the conditions that give rise to a trade to occur.  The result can be option prices that clear the market considerably higher than what one would think possible and Mike references the near 100% bid to implied correlation in 2012 as an example.Today, Mike is Chief Strategist for Logica Capital Advisers and, as usual, he has a lot on his mind.  We talk a good deal about passive investing, a strategy increasingly embraced as simply a better way.  For Mike, passive indexation is plenty active - there’s a  specific decision being made to buy stocks in proportion to their market caps.  At a time when both the SPX and NDX have become substantially top heavy, investors ought to question the efficacy of such a valuation agnostic approach.Please enjoy this episode of the Alpha Exchange, my conversation with Mike Green. 

The son of a physician and with a penchant for math, Andy Redleaf came upon options in high school, even before they were listed on the CBOE.  Post college, Andy landed in an option trading role and was making markets on the CBOE during the 1987 stock market crash. In his rendering, the introduction of stock index futures dramatically increased correlation among stocks and the creation of portfolio insurance left some investors short a put that no other investors were long.  In combination, this left the market vulnerable to such a sharp one day plunge in stock prices.  Our conversation considers market stress periods in the context of the neat mathematical models and their simplifying assumptions that may be enablers of these seismic events.We talk as well about Andy’s hedge fund career, first co-founding Deephaven and then founding Whitebox.  Both ventures were focused on exploiting mispricings in complex securities such as convertible bonds and the relative value between equity and corporate credit securities.  As the head of Whitebox for two decades, Andy oversaw the firm’s expansion into a global multi-strat fund that traded all asset classes and through periods of vol both high and low.  Our discussion brings to life the instability that Andy saw lurking beneath the surface of calm markets in the period prior to the financial crisis.  He shares his analysis of the wholesale mispricing of mortgage risk that was evident in the statistic that nearly 90% of the refinancings on New Century’s book increased the amount owed from the original mortgage.  This, Andy suggests, is an indication of a more desperate borrower.As we explore the important risk events that have helped shaped Andy’s philosophy on risk, we also pivot to the financial climate that is today.  Andy is skeptical that ultra-low interest rates are stimulative and sees the decline in interest rate income as a headwind for consumers who are trying to reach a specific financial goal through savings.  Today, Andy is principal of Park Financial Group, a firm finding opportunities to prudently lend in today’s climate of highly bifurcated credit allocation.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Andy Redleaf.

In 1998, Scott Ladner hit the derivatives scene at First Union, just as LTCM was imploding and equity volatility was rocketing higher.  No sooner would the Fed help contain that risk episode, then the tech bubble would be set in motion.  An intense period of “stocks up, vol up”  during which valuations expanded to unheard of levels, followed by an equally intense, “stocks down, vol up” characterized the period of 1999 through 2001 and provided hands on, sometimes painful experiences for Scott in managing convexity risk.  Short airline volatility during the September 11th terrorist attack, Scott quickly came to appreciate the potential for significant gap risk and discontinuity in markets, a reality not contemplated in the textbook version of Black Scholes.My conversation with Scott considers insights gathered over a career managing volatility exposure across asset classes and how he came to his role as CIO of Horizon Investments.  Scott shares his views on how volatility can come and go, how many factors can come to impact the price of options and how important it is to have a number of little bets on versus being overly concentrated in a singular exposure.  He points to the value, but also the dangers of option models, learning along the way not to take the output too seriously and to constantly re-examine the assumptions being made.  Today, Scott’s dashboard consists of credit, liquidity and risk metrics with the goal of identifying incongruities that help him focus his research to better understand market dynamics.  In this context, we discuss the early and late year vol events of 2018.Lastly, we discuss Horizon’s efforts on behalf of its clients to manage wealth and reach retirement goals within the constraints of the low growth and low interest rate environment.  His team is seeking to build risk management techniques that work specifically in today’s unique economic and financial climate.  Noting that there is now “an ETF for everything”, he sees the last 10 years as the age of product.  The next 10, in contrast, he views as the age of planning, where the focus should be on how to best utilize these new products to maximize the wealth and overall experience of retirement for individuals.  Please enjoy this episode of the Alpha Exchange, my conversation with Scott Ladner.