Alpha Exchange

Today’s derivatives markets – characterized by a vast array of complex OTC products, options with maturities as short as one day, and an ever increasing pool of non-equity ETFs – bear little resemblance to those of the 1970’s. In the earliest days of the listed options market, there were calls but not puts, limited expirations and just a sprinkling of single stock underlyings. It was in this era that Robert Whaley came on the scene and made an immediate impact. Armed with a PhD in finance from the University of Toronto, Professor Whaley quickly dove into the empirical study of derivatives markets, focusing on important topics such as the valuation of American put options, how option markets anticipate quarterly earnings announcements and the impact of program trading on the 1987 stock market crash. It was in 1993 that Professor Whaley published a paper that would fundamentally change the landscape of risk management. His Journal of Derivatives piece “Derivatives on market volatility: Hedging tools long overdue” described a brand new concept that sought to create a standardized metric for the cost of index options. More than 26 years later, the VIX is vastly a part of the language spoken not just by option market participants but by the investment community at large. Now, not merely a calculation, but a tradeable asset used for both speculation and hedging, the VIX index plays an important role in how investors read market risk dynamics and seek to profit from changes in volatility. Today, Professor Whaley is the Valere Blair Potter Professor of Management and Director of the Financial Markets Research Center at the Owen Graduate School of Management at Vanderbilt University. I was honored to have the opportunity to speak with Professor Whaley and learn more about his long and successful career in academia, his wide body of financial research and his meaningful perspective on the evolution of the VIX index over the years. Please enjoy this episode of the Alpha Exchange.

There is but one Convexity Maven in the world, a moniker that belongs uniquely to Harley Bassman. A 35 year career in financial markets has left Harley steeped in all things relating to the price of and characteristics of optionality. Our discussion on this episode of the Alpha Exchange starts with the early days of his career, including a position in Treasury option markets in the early 1980s. Juxtapose that experience - when rates and inflation were sky high - with his more recent market presence when rates and rate vol have rarely been lower - and one can appreciate the breadth of experience Harley has had. Our conversation covers the term structure of rate volatility, the variance risk premium and the way in which option sellers convert potential future capital gains to present day income. Along the way, we discuss the MOVE index, a well-followed metric for bond option volatility that Harley designed, as he explains how the MOVE is tied the slope of the yield curve. Lastly, Harley shares his views on global disinflation and what Central Banks are up against. Please enjoy this episode of the Alpha Exchange, my discussion with Harley Bassman.

There’s not much natural intersection between the study of mathematics and Russian literature. But for the ever-curious mind of Ray Iwanowski, the Wharton School provided exposure to both. Ultimately, Ray’s interest in math and physics would lead him to finance where he came upon the Black-Scholes equation and option pricing theory. After a stint in fixed income research focused on modeling mortgage securities, Ray set upon the Ph.D. program at the University of Chicago in the early 1990s, a vibrant time for advancement in the empirical study of asset pricing. Utilizing the toolkit he developed, Ray landed at Goldman Sachs Asset Management where he ultimately co-ran the firm’s Global Alpha business. Today, Ray is co-founder and CIO of SECOR Asset Management, a firm that provides customized portfolio solutions to institutional clients around the world. My conversation with Ray considers the current state of factor investing in light of the increasingly competitive search for alpha. In the process, we look back on the 2007 quant crisis, exploring the questions of factor timing, crowding risks, and the correlation of momentum and value strategies. We also look forward as Ray shares his views on harnessing data and utilizing artificial intelligence and machine learning. Lastly, we delve into the volatility risk premium, how it has evolved over time, and the reflexive properties of volatility. I thoroughly enjoyed this conversation, and the perspective Ray offered through his experience as a quant investor. Now, my discussion with Ray Iwanowski on this episode of the Alpha Exchange.

After a lengthy and successful tenure on the risk-taking side in equity volatility, Henry Schwartz decided the US listed options community would benefit from technology that made reading the tape easier. In 2005, he launched Trade Alert, a fintech innovation that does just that. Nearly 15 years later, Trade Alert is a tool employed by buy-side and sell-side market participants who value the functionality in piecing together the continuous and often complex flow within the US options market. My conversation with Henry is a meaningful retrospective on the changes in the derivatives markets that have resulted from technology. We look back to an era gone by – pre-ETFs, pre-electronic trading and before options were dually listed. Henry shares his perspective on the evolution and growth of the marketplace and the key events that led to the proliferation of exchanges, different fee structures, and new types of investors. Please enjoy this episode of the Alpha Exchange, my discussion with Henry Schwartz.

When your very first day in the investment industry happens to coincide with a 20% plunge in the S&P 500 Index, your ultimate risk philosophy is likely to incorporate a strong appreciation for market psychology. Such is the case for Gerard Minack, who began his career on October 19th, 1987. Plying his trade throughout the 1990’s, Gerard would ultimately rise to lead Morgan Stanley’s macro strategy effort. In 2013, seeking to increase his PB ratio, he launched his own firm, Minack Advisors, focused on delivering his insights on markets, monetary policy and the global economy to an institutional client base. Our conversation is part retrospective on the history of important risk events, where we delve into both the tech bubble and the Global Financial Crisis and discuss the powerful role of psychology during both episodes. On a more current basis, Gerard shares his analysis of the extraordinary monetary policy regime including negative rates and QE, both of which he views as underwhelming with respect to their ultimate impact on growth and inflation. Gerard has strong views on structural secular stagnation, a thesis he lays out utilizing a framework that gives weight to slowing population growth and the mismatch between global savings and investment. I also solicit his views on disinflation, the Phillips Curve and Modern Monetary Theory. I find Gerard Minack’s insights highly compelling and I hope you enjoy our conversation in this episode of the Alpha Exchange.

Utilizing a framework built over two decades, Alex Kazan is keenly attuned to today’s complex world of geopolitical risks and the implications for markets. Argentina’s sovereign default episode two decades ago demonstrated the importance of institutional credibility with respect to managing through an economic and currency crisis. Years later, the Great Financial Crisis would further inform Alex of the interaction between policymaker goals and what markets would and could bear. Today, as a Managing Director at Eurasia Group, Alex and his team bring a rigorous combination of economics and an understanding of country risk to assessing the geopolitical chess game. Our excellent conversation covers European populism, Brexit, the US / China standoff on trade and the hollowing out of Centrism in America’s politics. Among the risks that keep Alex up at night is the potential for what he calls an “innovation winter” — a politically underpinned shortfall of the financial and human capital needed to drive the next generation of emerging technologies.

A native Australian, Christian Hauff capitalized on the financial crisis to co-found Quantitative Brokers with Robert Almgren in 2009. After working together on the development of agency algorithmic technology in equities and equity options, Christian and Rob saw an opportunity to apply some of that IP to the world of fixed income, where no such solutions existed at the time. Christian describes the “trader’s dilemma”, a challenge that every investor faces in whether to execute a desired trade instantaneously or to work this order over a period of time. He explains how his firm’s algorithms help its clients optimize this trade-off to minimize slippage and reduce their implementation short-fall. Our conversation provides insights on the early days of QB, where countless hours were spent in the lab studying the “rule book” of Eurodollar futures to better understand micro-structure mechanics that underpin Algo execution strategies. We also talk about research at QB, including its deep-dive into the Treasury Flash Rally of October 2014 and the VIX spike in February 2018. Lastly, Christian shares his views on the future of agency electronic execution including the trend toward more robust transaction cost analysis, improved access to more markets such as FX and centralized clearing. I hope you enjoy this episode of the Alpha Exchange, my wide-ranging conversation with Christian Hauff.

Hitting the Street in the bear market days of the late 70’s, Michael Aronstein became quickly engaged in studying the Fed, interest rates and inflation. His perspective, enabled by managing capital through high and low inflation and volatility regimes, reminds us of the old adage “there are no bad securities, only bad prices”. A value-oriented investor with a taste for being contrarian, Michael’s research process blends an appreciation for market cycles, a respect for the power of Central Banks and a willingness to listen to what’s on peoples’ minds. Our conversation on the 1987 crash includes his effective use of put options to ensure the portfolio and the impact of fast-rising US rates on the trade-off between being in risk. We also cover the formation of Marketfield Asset Management in 2007, where Michael is Chief Investment Officer and how clearly he saw the excess of housing during that period. In present day, Michael is concerned that the big wealth creation of the new economy is at risk, vulnerable to a slowdown in the money needed to keep the machine running. Please enjoy this episode of the Alpha Exchange, my discussion with Michael Aronstein.

In the market for global equity volatility, few investors have the magnitude of experience of David Rogers. Starting at Goldman Sachs in 1982, Dave was evaluating option strategies in the nascent period of the US derivatives market. His experience through the ’87 crash as well as his time in Asia in the early 1990’s, were formative in establishing a risk management philosophy that has proven critical during the many episodes of market turbulence of the past two decades. Our conversation around the Long Term Capital unwind in 1998 and its exposure to short equity volatility, illustrates the importance that Dave puts on patience and position sizing. Founding JD Capital Management in the aftermath of the tech bubble, Dave has managed complex option exposures from both the long and short side through periods of high and low volatility. Our discussion considers correlation dislocations during the Great Financial Crisis, the impact that structured products can have on volatility surfaces, and the changing regulatory landscape and resulting implications for risk intermediation. We finish by contextualizing the 2017 low vol tail event as Dave shares some of his thoughts on the recent bout of equity vol and what to expect next. Please enjoy my conversation with David Rogers.

Today’s guest on the Alpha Exchange is Tim Duy, the Professor of Practice in the department of economics at the University of Oregon. After earning a PhD in economics there, Tim worked at the United States Treasury and later with the G7 Group, a political and economic consultancy where he focused on monitoring the Fed for clients and market participants. Tim returned to the University of Oregon in 2002 and is currently the Senior Director of the Oregon Economic Forum. In an environment in which Central Banks have become a substantial presence in markets, Tim has gained prominence as a Fed Watcher and is the author of the highly followed “Fed Watch” blog. My conversation with Tim focuses on the state of the US economy, the thinking of the Fed and its messaging to markets, the outlook for inflation, relevance of the Philips curve and thoughts on the balance sheet. I hope you enjoy my conversation with Tim Duy.