Alpha Exchange

Market prices are the outcome of a myriad of factors. Geopolitical developments, the economy, the regulatory landscape and the actions of Central Banks all matter. So, too, do market participants and the set of products they utilize to assume or reduce risk exposures. For Rocky Fishman, the founder of newly formed derivatives strategy firm Asym 500, studying complex products and the mechanical flows they often generate is critical.Our discussion is a review of market risk episodes and how risk management schemes that use volatility as a direct input can accelerate price moves in the broad equity market to both the upside and downside. In this context, we discuss the Feb'18 XIV event as well as the rapid repricing of risk in August of 2015 when China re-pegged its currency versus the dollar. Both events speak to the importance of the positioning that can become lopsided when realized volatility has been especially low.We also talk about diversification and correlation. Here, Rocky makes the point that investors must respect the degree to which an impaired market can cause economically similar securities to become severely dislocated. Lastly, we talk about zero day to expiration options. Not seeing the case for Volmaggedon 2.0 at this point, his work at Asym500 will nevertheless be focused on carefully studying short-dated option flows. I hope you enjoy this episode of the Alpha Exchange, my conversation with Rocky Fishman.

As Global Co-head of Portfolio Solutions at AQR Capital Management, Dan Villalon is primarily engaged in helping the firm’s clients address constantly evolving challenges around risk management. Central to these, of course, is the search for efficient sources of diversification. In this context, our discussion explores research his team has done in two primary areas.First, we talk about defending against drawdowns that are both fast and slow and back-tests that compare options-based hedging with strategies like trend following that do not require explicit premium payments. For rapid market sell-offs, like those that occurred during the GFC and the Covid crash, explicit, premium based insurance works well. This approach can suffer, however, as the market bottoms and recovers even as option prices remain high. Trend following strategies, while not as effective for sudden market plunges, tend to be more effective in offsetting losses that occur during slower drawdowns, as occurred in 2022.Dan makes the point that a robotic strategy that buys assets that have trended higher and sells those that have trended lower tends to work across asset classes and around the world, at odds with market efficiency. One possible explanation put forth is “under-reaction”. Here, investors respond to good news, but not initially by enough, leaving further gains on the table.Lastly, we talk about AQR’s recent work on international diversification. Noting that US stocks have been the place to be for 3 decades, the firm sees an important place for international equities going forward given the view that the tailwind of rising relative valuations in the US may be behind. I hope you enjoy this episode of the Alpha Exchange, my conversation with Dan Villalon.

With an early passion for video games and teaching himself programming languages Q-Basic and C, Corey Hoffstein did not expect to ultimately wind up in money management. But exposure to various roles in the industry through an internship started him down the path, helping him see how to marry his love of computer science with markets.Now the CIO of Newfound Research, a firm he co-founded more than a decade ago, Corey is focused on delivering to investors the one free lunch they are entitled to: diversification. We spend most of the discussion here, with an emphasis on “return stacking”, a strategy that Newfound embraces to expand access to diversifying assets. In this light, a topic we spend some time on is trend following, a strategy that has proven to deliver attractive low correlation to stock and bond returns.Corey describes the manner in which the implementation of trend following is similar to the delta hedging of a long volatility position, allowing the strategy to provide some portfolio protection in risk-off events.And with risk-off in mind, we talk as well about “liquidity cascades”, research that Corey and his team have done to highlight the manner in which trades that live and breathe within the market’s ecosystem of risk can create spill-over effects that amplify asset price movements. I hope you enjoy this episode of the Alpha Exchange, my conversation with Corey Hoffstein.

Your host is back again, providing some thoughts and commentary on the recent period of low volatility in the equity market. With SVB and the debt ceiling uncertainty mostly in the rear-view, markets embraced the calm, experiencing just a single 2% up move and a single 2% down move in the first half of 2023. I break down the causes and consequences of lower volatility. Along the way, you’ll hear some talk on the gamma/theta trade-off, stock bond correlation, the price of upside calls in the S&P 500 and what appears to be an attractive level of implied volatility for gold. Hope you enjoy!

As we cue up some new guests for the Alpha Exchange, some reflections from your host on the Black Scholes model and its 50th anniversary. No model is perfect and traders must grapple with real world frictions not entertained by the model. I discuss how option market participants make adjustments and why. Hope you enjoy! 

In a world bubble for the Alpha Exchange podcast, the words vol, carry and convexity would be prominent. And in this episode, featuring Amy Wu Silverman, the Head of Equity Derivatives Strategy at Royal Bank of Canada, we dive into these concepts head on. First, we learn about Amy’s experience in structured rates when, in and around 2007, Fannie and Freddie were the go-to credit to which all kinds of complex instruments were attached.Reflecting on how wrong this ultimately went, she tells us that it often takes the experience of crisis to help us appreciate ways in which market realities can deviate violently from the textbook. We explore some of Amy’s framework, which leans into the value of market prices in helping establish consensus and forming a starting point for investors to map their own distributions of outcomes versus that implied by the market.We then talk about option prices and market risk dynamics today with attention to the huge surge in NVDA and the impact on both option vol surfaces and passive indexation. Amy sees risk in the exceptionally narrow breadth that the surge in NVDA is part of.I hope you enjoy this episode of the Alpha Exchange, my conversation with Amy Wu Silverman.

There's always a bull market somewhere, and in today's climate of hyper short termism, both volume and commentary are thriving in the land of zero days to expiry options. While the risk characteristics of ODTEs are generally agreed on, the directionality of the flows and resulting positioning remain subjects of vigorous debate. With this in mind, it was a pleasure to welcome Nitin Saksena, the Head of US Equity Derivatives Research at BofA Securities, to the Alpha Exchange.Before embarking on the work that Nitin and team are doing to better understand these ultra short dated options, we survey the landscape of cross-asset vol. Here, Nitin notes that options on certain currency pairs - for example in the Canadian dollar - score on the cheap side on a nominal basis. On a relative basis, rate vol remains substantially high compared to SPX vol as the MOVE index is just 20% off its Covid high while the VIX has declined by 80%.Next, we turn to the risk implications of the substantial flows in daily SPX options. Given the convexity, there are scenarios imagined by some in the industry in which an unwind of wrong-way exposure can accelerate price movements in the index. While respecting the logic of the analysis, Nitin pushes back on the degree to which the flows are one-way, seeing a balance of trades on the long and short side of options. Still, he cautions that because these instruments and the resulting risk exposures are new, we should be carefully monitoring them.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Nitin Saksena.

The hedge that carries positively but delivers convex returns during a market panic is about as elusive as our lawmakers coming together in bipartisan fashion. As head of option strategies at AQR, Roni Israelov not only confirmed this but saw in the empirical data distinctly unpromising results for hedging strategies that utilized put options.Trained with a PhD in Financial Economics from Carnegie Mellon, Roni has spent his career researching complex topics in markets. We explore his paper “Pathetic Protection” and the challenges that arise from paying option premium to reduce risk. Roni sites the path dependency of options as introducing sometimes significant variability in the effectiveness of a program. He also sites the equity risk premium and the vol risk premium as headwinds for success.Our conversation shifts to another interesting topic, “rebalance timing luck”, work that Roni has done in collaboration with Newfound Research. The finding - that the performance of mechanically rebalanced strategies – can rest heavily on the date of rebalance, is especially the case for option strategies like the giant put spread collar on the SPX that is rolled each quarter.Roni is now the President and CIO of NDVR, a firm providing optimized portfolio solutions to individuals, using academic research, technology and tax efficiency. I hope you enjoy this episode of the Alpha Exchange, my conversation with Roni Israelov.

Welcome to a special edition of the Alpha Exchange, one in which your host and guest are one and the same. Above all, our conversations on this podcast are aimed at helping you think about risk. After all, it was the Spanish philosopher George Santayana who famously said, “those who forget history are doomed to repeat it.”This podcast has three parts. First, an update on a project I’ve been working on, MacroMinds. I created this foundation back in 2019 to raise funding for causes in the NY area focused on student education. Our “business model” is simple – host a once a year, highly differentiated symposium featuring industry leaders who share their insights on the remarkably complex world of investing. On June 7th in NYC, we are doing just that, and I could not be more excited about our incredible agenda.Second, I review a couple of prices in the world of optionality and what they mean in the context of today’s risk dynamics. Specifically, I discuss the fast widening level of CDS written on the US as the reference asset. In the context of the unfolding debt ceiling drama, this instrument is worth keeping an eye on. Next, I review the change in the volatility surface on gold, specifically the emerging bid to upside calls.Lastly, I review some work I did a number of years ago, which I call, simply, “Ten Handy Facts on Vol”. These are characteristics of the behavior of volatility in asset prices and the options that are written on them. I hope you find some value in this exercise and I thank you for listening.

What has experience taught us about consequential market risk events? First, volatility in asset prices can materialize when a strongly held consensus view is shattered. Presented with “new news” – about defaults, about inflation, about earnings – investors may be forced to shed exposures, right-sizing their risk allocations to this new state of the world. Market vol episodes can be especially protracted when the attendant uncertainties do not fit neatly into an Excel spreadsheet.Here, the US debt ceiling checks the boxes. And against the backdrop of an emerging standoff, it was a pleasure to welcome Libby Cantrill, the Head of Public Policy at PIMCO, to the Alpha Exchange. Our discussion explores the sometimes chaotic intersection of politics and markets and the way in which her work is utilized by risk takers at PIMCO. We spend the bulk of our conversation on the debt ceiling and here Libby lays out how the 2023 version has important differences from the 2011 version, specifically in the degree of leverage that the Republicans had then versus now. While of the view that a default is avoided, she sees it as a last minute agreement almost by necessity and with that some market disruption may occur.We finish with a discussion on where 150 million Americans are spending their time, TikTok. Libby helps frame this out in the broader context of the intensifying geostrategic rivalry between the US and China. Noting that “tough on China” has become a bipartisan view, and with the recent spy balloon incident in mind, she sees more catalysts for decoupling on the way, further tension and the potential spillover into the market.I hope you enjoy this episode of the Alpha Exchange, my conversation with Libby Cantrill.