Alpha Exchange

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 passi

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. Giv

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 – c

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 ref

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

25 years post the chaotic unwind of Long Term Capital Management, there are lessons a plenty to be gleaned from this event. With this in mind, it was a pleasure to welcome acclaimed writer Roger Lowenstein, author of the famous book “When Genius Failed”, to the Alpha Exchange. His work is a compelling chronical of the vast success but ultimate failure of this storied hedge fund.We discuss some of the philosophical underpinnings of the firm’s risk management framework, focusing on the influence of Nobel Prize winners Myron Scholes and Robert Merton. We review some of LTCMs favorite trades and how in reality they were far less diversified than they appeared. And we discuss the rescue, a messy episode involving banks, the Fed and Warren Buffet, kind of.I hope you enjoy this episode of the Alpha Exchange, my conversation with Roger Lowenstein.

Welcome to the Alpha Exchange Q1 2023 Review, in which we assess some of the trends in market risk that have recently been important. We discuss gold, the performance of VIX ETP strategies and the return of traditional risk on/risk off. We also spend time dissecting changes in the shape of the S&P 500 Index volatility skew and commenting on that well known put spread collar. We finish with some information on the MacroMinds Investment Symposium, an event taking place on June 7th in New York City that raises critical funding for education focused charitable organizations.  Thank you for listening.

I like to say that you learn the most in markets by studying the periods when things go horribly wrong. And in this spirit, Alpha Exchange guests are often asked to reflect back on risk events of great consequence. 2023 marks the 25th anniversary of the LTCM fiasco, an event too long ago to matter for anyone under the age of 40, even as there are valuable lessons to be had from this giant portfolio unwind. As we look back on this vol event from 1998, it was a pleasure to welcome Nicholas Dunbar, author of “Inventing Money: The Story of Long Term Capital”, to the podcast. With a background in math and physics and with a long stint at Risk Magazine, Nick was well equipped to explain how the effort to conquer markets through the science of derivatives ultimately failed. Along the way, he provides a brief history of how option theory has developed, brings to life key players in the story and dives in to technical details of LTCM’s trades. We learn about the dangers of models, leverage, hubris and crowding all at

There are lies, damn lies and statistics as the saying goes, and about the latter, Adam Parker knows a thing or two. Armed with a Phd in stats, he began his Wall Street career as a semi’s analyst at Sanford Bernstein in 1999. Reflecting back on the deep dive research the firm was known for, he notes that today’s rapid fire information environment requires especially efficient communication to clients.We look backward to gather some insights on how Adam’s framework and process came to be. Markets teach lessons and for Adam, it is the recovery periods – March 2009 and March 2020,  for example – that illustrated the need to look past headline negativity and embrace risk when it was difficult to do so. He shares as well the challenges inherent in determining if change – in margins, in profits and stock price, for example – is structural versus cyclical.We shift to Adam’s founding of Trivariate Research, a firm providing top down investment strategy to institutional clients. First, we review some of chaos that ens

With 3 decades in markets, Jon Golub’s career is split evenly between the buyside and sell-side. Reflecting on his early days in the industry, Jon notes the especially benign environment that characterized the 90’s, a period of post-Cold War geopolitical stability, with the trauma of 70’s inflation sufficiently in the rear view even as the tail wind of lower interest rates was still a positive force in markets. While analyzing time series of economic and financial data is a critical part of his team’s process, Jon is careful not to draw broad conclusions because in market cycles, “this time is actually different” probably applies more often than not. He points to the less debt heavy capital structure of key segments of the S&P 500 today versus decades ago as a ready example of the unique attributes of different time periods.Our conversation shifts to Jon’s work as Chief US Equity Strategist and Head of Quantitative Research at Credit Suisse and his assessment of present day risks and opportunities. Here h

Sketching out a business plan in 2012, Eric Liu and his Co-founders saw an opportunity to create a product that simplified the world of macro for investors. Vanda Research was born, a firm that seeks to connect the top-down with the bottom up and in the process, fill a gap by providing clients with shorter term tactical research ideas. A decade later, the evolution of Vanda leans heavily on the collection of and analysis of unique and often high frequency data sets. Making the point that “2020 was a year when alternative data sets went mainstream”, Eric reflects back on the Pandemic and the search for clues as to the speed of economic reopening, looking at various measures of supply chain disruption.With the notion that price moves result not just from how investors process new developments but also by the stance of positioning, a large component of the Vanda product is looking for instances in which investors are either over or under-exposed to assets. With respect to the latter, Eric cites palladium and pla

Rebecca Patterson has always sought out new career challenges, willing to take risks in the process. Amidst the Asian financial crisis in 1997, Rebecca was hired into a Strategist position within the asset management side of JP Morgan, giving her early exposure to one of those 100 year market storm events that seems to actually happen every 10 years. She began building out a macro, data driven framework that was underpinned by the vast array of complex linkages between the economy and markets. In 2012, she joined Bessemer Trust, serving as the CIO and overseeing $85 billion of client assets.At the heart of our conversation is uncertainty, a reality in markets that Rebecca has considerable respect for. In this context she shares her risk management process going into the 2016 US election and the detailed work her team did to game out a number of scenarios and their potential impacts.We shift to Rebecca’s time spent at Bridgewater Associates, where she served as the firm’s Chief Investment Strategist until rece

Among the major asset classes, no market has experienced a sea-change in volatility levels more so than the US government bond market over the past few years. Consider that the MOVE index reached the low 40’s in 2019, spiked to 160 during the March’20 Covid market crisis, descended below 40 in late 2020 and then surged in 2022, again reaching 160. It is against this fast-changing risk backdrop, and exceptionally high vol of vol that I had the pleasure of welcoming Deep Kumar to the Alpha Exchange.The Co-CIO of III Capital Management, Deep is engaged in finding value in global government bond markets, deploying relative value strategies across the curve and utilizing derivatives to seek out asymmetric return opportunities. Armed with a PhD in hypersonics, Deep hit Wall Street in the mid 90’s, building risk and pricing models that leveraged his understanding of the math that underpins derivatives pricing. Our discussion looks back on some of the formative events that Deep has encountered and how those have ceme

For Francois Trahan, early exposure to econometric models that sought to forecast business conditions illustrated the importance of changes in interest rates. Over a 25 year time frame, he’s developed a framework that utilizes variables that lead the business cycle and consistently have information content with respect to where markets are heading. We talk about challenging times for risk assets – distinguishing crisis episodes like the GFC in 2008 from bear markets experienced in 2001 and 2022. For Francois, these are all linked, with commonality in how interest rates created an economic slowdown which then left asset prices vulnerable.Now the founder of Trahan Macro Research, Francois has a decidedly bearish outlook for US equities, very much a consequence of the exceedingly steep trajectory of short-rates, moving from essentially zero at the start of 2022 to 4.5% now. His set of macro leading indicators all point in unwelcome directions and his view is that the equity sell-off last year is just an appetize

A "beaten path" refers to a route that is frequently traveled. In markets, for years, this path led investors to be long both stocks and bonds in unison under the premise that duration exposure would mitigate losses during a sell-off in risk assets. In 2022, amidst sharply rising inflation, investors learned painful lessons that stock and bond prices can become highly correlated. For Dylan Grice, Co-founder of Calderwood Capital, the search for exposures that are off the beaten path has always been a natural pursuit.Originally trained as an economist, Dylan realized early in his career that he was less geared towards making predictions. Instead, his focus is on evaluating the price of uncertainty, looking for opportunities to invest with hedge fund managers that emerge when the price of risk is favorable on either the long or short vol side of the ledger. In his search for cheap optionality, Dylan saw value in being short mortgages in 2021, a time during which interest rate volatility was exceedingly depresse

Welcome to a special year-end episode of the Alpha Exchange where we look back on market risk dynamics that defined 2022, a painful year by nearly all counts. We’ll finish by looking forward, contemplating the set of uncertainties investor will be confronted with in 2023, sharing a few recommendations on the hedging, alpha generation and portfolio construction front. As 2022 is in the books, the Alpha Exchange podcast recorded 30 episodes this year. It’s been a rewarding experience and I am truly thankful to our guests for taking me up on the invite to share their insights with our listeners. We’ll continue this same pursuit in 2023 and have some interesting new initiatives planned as well. I wish you a safe New Years and a highly prosperous upcoming year. Thank you for listening!

In the world of bonds, few firms are as powerful and enduring as PIMCO. And few investors are as storied as Bill Gross whose impact on active fixed income trading and risk management has been substantial. The “Bond King”, by Mary Childs, is a compellingly researched and written book on these two subject matters. Through hours of direct conversation with Bill Gross, discussions with many of the significant players at PIMCO and a careful recounting of some of the most consequential events in market history, Mary presents a story that began in the early 1970’s, reaching a tumultuous unwind in 2014.Through our discussion, we learn of Mary’s first interaction with Bill Gross, finding herself at Bloomberg as a reporter and on the wrong side of communicating a p/l number he took issue with. Motivated to bring the less well understood world of fixed income to life, she set out to chronicle the founding of PIMCO and its tremendous growth under the leadership of Bill Gross. Along the way, we learn of clever arbitrage t

We next turn to Scott’s time at Secor Asset Management, running portfolio solutions and working with global pension plans on asset/liability risk. Scott shares his perspective on the recent blow-up in the long-dated Gilt market, stating that in some ways this was an accident waiting to happen given the mismatch in duration exposure required and that accessible through the cash Gilt market. The balance of our discussion is spent on Scott’s work as CIO of Advocate Capital, a firm he founded in 2016 to deliver risk mitigation solutions to investors. Part of this product suite is the RRH ETF, a vehicle designed to protect investors from rising rates through a combination of exposures that serve as cost effective proxies for being short duration. Scott shares his framework for implementing a multi-asset set of strategies that profits when interest rates rise.With Scott’s view that inflation will prove sticky and that the terminal funds rate will be higher than currently priced by the market, investors need to be t

Originally trained as an economist and now the Chief Global Strategist at Principal Asset Management, Seema Shah spends her time looking at the intersection of fundamentals, technicals and valuation. Our conversation first considers the low growth, low inflation era that persisted post GFC but pre-Pandemic and here Seema distinguishes between strong economic expansion and favorable market conditions.  Of course, the opposite has been the case in 2022, as the Fed has been forced to tighten at an exceptional pace and asset prices have suffered amidst strong growth.Noting the importance of watching Central Banks, Seema asserts that you have to recognize when they are in the process of making a mistake, something that became increasingly apparent as 2021 progressed. We turn to inflation. Seema stresses the importance of labor market tightness, how it leads to wage growth and how that imposes challenges on the Fed’s mission to reduce inflation.With a view that price pressures will persist and that policy rates wil