Flirting with Models

In this episode I speak with Harel Jacobson, an FX volatility trader. There is a lot that makes the FX volatility market unique.  For starters, the end users are more focused on hedging cash-flow and liquidity than wealth.  Since the underlying is currency pairs, volatility surface arbitrage conditions become multi-dimensional.  And then there is the global geopolitical event calendar to consider. Did I mention that trades are performed, almost exclusively, OTC?  So even something like price discovery, which we take for granted on listed exchanges, is non-trivial.  Especially if you want to backtest a new research idea. This is a fascinating conversation into a fairly niche, but important global market. I hope you enjoy my conversation with Harel Jacobson.

My guest in this episode is Andrew Beer, co-founder of Dynamic Beta Investments. Andrew has spent the last 15 years trying to pioneer the adoption of hedge fund replication strategies.  The core thesis is that several hedge fund categories can be dynamically replicated using just a handful of liquid market exposures and some regression techniques.  He argues that if he can deliver the strategy beta while cutting out hundreds of basis points of management fees and trading costs, it would consistently earn him a top decile rank.  And all this can be done in a daily liquid vehicle. The Devil, of course, is in the details.  Which categories can be replicated is an important consideration.  Whether to perform a bottom-up or top-down replication is another.  And, obviously, which factors to incorporate.  Andrew stresses that the answer to all these questions comes not from quantitative analysis, but from a qualitative understanding of how hedge fund managers actually operate. This episode may not be as technical as others, but it certainly had me walking away thinking, “if there’s no points for originality, it certainly seems a lot easier to just copy the work of others.  Especially if I can cut out all their fees.” Please enjoy my episode with Andrew Beer.

My guest in this episode needs no introduction: Antti Ilmanen, co-head of Portfolio Solutions at AQR, award winning researcher, and author of the books Expected Returns and the recently published Investing Amid Low Expected Returns. A decade has passed since Antti wrote his first book, providing both a decade of out-of-sample data as well as a decade of new research.  I begin by asking Antti about where his conviction has hardened and the things he’s changed his mind about.  From there, however, the conversation topics become much more wide ranging.  We discuss structural changes in the market, the growth of passive investing, and his research on who is actually on the other side of style premia trades.   We then discuss trend following versus put protection, trend following’s difficult decade, and why the outlook for trend may be rosier going forward. Finally, we touch upon some more practical topics, addressing low-hanging opportunities Antti has seen in his role as co-head of Portfolio Solutions at AQR. I hope you enjoy my conversation with Antti Ilmanen.

My guest this episode is Ralph Smith, Head of Research at BlueCove. BlueCove offers long-only and market-neutral mandates in corporate credit and interest rate markets, with an emphasis on utilizing a scientific approach to portfolio construction. We spend the episode discussing how the unique nature of fixed income markets present both opportunities and risks.  For example, how the differing breadth and liquidity in corporate credit versus rates markets impacts the types of strategies that can be implemented.  Or, how the assumption about a bond’s availability or liquidity can materially impact a portfolio backtest. As Head of Research, Ralph also has some strong thoughts on the research process itself.  He shares his views on structuring a research organization, performing research in changing market environments, and even the appropriate use of backtests. Please enjoy my discussion with Ralph Smith.

My guest in this episode is Kai Wu, CEO and founder of Sparkline Capital. Kai is a pioneer in the measurement of intangible value.  Using machine learning, he tackles unstructured data sources like patent filings, earnings transcripts, LinkedIn network connections, and GitHub code repositories to try to measure value across the four key pillars of Brand, Intellectual Property, Network, and Human Capital. We discuss why intangibles are important, how they differ from the traditional factor zoo, the opportunities and risks of unstructured data, and how even big data can have small data problems within it. Finally, we discuss Kai’s most recent applications of his research to the world of crypto. Please enjoy my conversation with Kai Wu.

Today I speak with David Sun, a retail trader who started his own hedge fund. Coming from a non-traditional background, David takes a non-traditional approach in his investment mandates.  Focused on selling options to capture the volatility risk premium, David believes that markets are ultimately efficient and therefore foregoes using any sort of active signal.  Instead, he focuses on explicitly controlling his win size relative to his loss size, and then choosing a strategy with a win rate that bumps him into positive expectancy.  By then maximizing the number of “at bats,” he lets the Central Limit Theorem take care of the rest.  It’s an approach he calls “expectancy hacking.” We discuss this approach in both theory and practice, addressing issues such as trading costs and slippage drag, as well as both sequence and event risk.  David’s approach is certainly non-traditional, but highlights some unique concepts of how traders may be able to architect a payoff profile around a risk premium. Please enjoy my episode with David Sun.

In this episode I talk with Aneet Chachra, fund manager at Janus Henderson. In his role, Aneet runs flow-driven strategies.  These are strategies that seek to find an edge in market events where trading volume creates a predictable pressure on price, such as index additions or deletions, corporate buybacks or issuance, or even the rebalancing of target date funds.  Our conversation is wide ranging, from the basics of how Aneet categorizes these types of trades, to views on how changing market structure has affected the opportunity set, to the impact of social leverage on risk management. While the approach may be highly niche, Aneet is bursting with broadly applicable wisdom. I hope you enjoy this episode with Aneet Chachra.

In this episode, I speak with the Twoquants: Moritz Seibert and Moritz Heiden. There are really two halves to this episode.  In the first, we discuss trend following strategies at length.  We cover the usual topics of signals, speeds, and portfolio construction before diving into some niche views, such as synthetic assets, spread trades, and alternative roll schedules. In the second half, we pivot to discuss crypto markets, as the Moritzes now serve as CIO and CTO for the Exponential Age Digital Asset Fund.  We discuss their journey into crypto, their explorations of the NFT space, considerations that make crypto unique from traditional markets from an allocators perspective, and advice for emerging managers in the space. So kick back, relax, and please enjoy my conversation with Moritz Seibert and Moritz Heiden.  

In a first for Flirting with Models, my guest this episode is anonymous, going only by the handle LightSpringFox on Twitter.   Mr. Fox is a quantitative trader who works in crypto market making at MGNR. Mr. Fox did not begin his career in crypto, nor even in market making.  Rather, his background is in traditional equity factor investing, and so we spend a good deal of comparing and contrasting the low- and high-frequency domains.  We also discuss the nature of market making edges, the unique risks of high frequency, how crypto and traditional finance market making deviate, and what Mr. Fox considers the “hardest problem in HFT.” Without further ado, please enjoy my conversation with LightSpringFox.

In this episode I speak with Michael Green, Chief Strategist as Simplify ETFs.  In a first for the Flirting with Models podcast, we recorded this episode live at the ETF Exchange in Miami in early April 2022.   Given Michael’s eclectic background, our conversation is wide ranging.  He has traded everything from small-cap value to commodities to housing derivatives to long volatility, and so we try to find the common elements and themes across his career.  One that sticks out is his quote that “it’s not enough to do the analysis: there needs to be a trade there as well.” Michael has become well known for his view that passive investing may now represent a systemic risk to markets.  We discuss the origins for this view, how it has evolved, counter-points, and the trade that pairs with the analysis.  Finally, we discuss the Simplify High Yield PLUS Credit Hedge ETF, the first strategy from Simplify that really has Michael’s fingerprints all over it. I hope you enjoy my conversation with Michael Green.