Alpha Exchange

For Mark Friedman, the Founder and CIO of DLD Asset Management, the convertible bond market has always made for interesting study.  Sitting at the intersection of critical asset classes, the convertible bond market requires investors to assess risk from many dimensions at once.  And with valuation components derived from equity, interest rate, credit and volatility risk, converts have provided Mark with plenty to analyze over nearly 3 decades in markets.  Our conversation is a retrospective on the evolution of this hybrid product – from Mark’s early days trading Asian convertibles in the mid 90’s to the high vol, crowded era of the early 2000’s, all the way to today.  Along the way in our discussion, we happen upon some of the important risk events in converts that Mark has traded through.  He highlights some of the ancillary risks that an investor assumes in a converts, specifically, borrow, dividends and a vol dampening take-over, and how the market has sought to address these.  We also spend some time asse

As founder and CIO of QVR Advisors, Benn Eifert spends his time looking for opportunities in volatility markets and helping his investors protect capital through periods of uncertainty. With the surge in volatility that has recently materialized in GameStop and a number of other stocks with high short interest, it was timely to have Benn back on the Alpha Exchange to share his always excellent insights on option market dynamics.  Our discussion considers the emergence of a factor that may have been hiding in plain sight – crowd sourced convexity that left option hedgers short gamma.  In the process of laying out this recent single stock risk event, Benn clarifies some of the misconceptions that may be common around the retail options trading community.  From Benn’s vantage point, some of these investors are hardly unsophisticated and understand leverage, positioning and the feedback loops that can occur when dealers are hedging options from the short side.  As we step back and consider the ecosystem of supply

We take things in a different direction on this episode of the Alpha Exchange and focus on the importance of leadership and culture at large financial institutions. With this in mind, it was my pleasure to solicit the insights of Mark Miller, a personal mentor of mine and a capital markets professional whose sell-side career has spanned 4 decades. Having served in the role of global head of sales at Citigroup, BofA and HSBC, Mark has led significant teams of professionals across product areas and geographies. In this context, we explore the challenges and opportunities inherent in bringing together a firm's resources on behalf of its client base. We also discuss the process for evaluating talent, and for Mark, the successful salesperson is highly competent in understanding market pricing dynamics and often has the capacity to be a trader. In conjunction with this, a salesperson's success is contingent on having earned the trust of her or his clients. We also talk about leadership and what it takes to establis

Mentored at Legg Mason under the tutelage of legendary investor Bill Miller, Samantha McLemore is a student of finding value in corporate equities.  Now the founder and managing member of Patient Capital Management, Samantha shares her perspectives developed over two decades and through several cycles of the value factor.  Our conversation is an exploration of Samantha’s framework, keenly focused on finding opportunity based on valuation and with a long horizon in mind.  In Samantha’s world, embracing out of favor securities allows capital to be put work when and where others are reluctant to and sets the stage for achieving long term excess returns.  In this context, she recounts her purchase of UBER during the early days of the 2020 lockdown, seeing potentially strong upside relative to what she deemed as manageable downside risk.  We talk more broadly about the underperformance of the value factor in recent years as Samantha notes that the high growth segments of the market are in demand in an environment

Working as an architect in the 1990’s, Tania Reif saw first hand the devastating impact on local communities of the currency crisis events that occurred with some frequency in her home country of Venezuela.  Gripped by the field of macroeconomics, Tania ultimately earned a PhD in economics from Columbia University, writing her dissertation on currency crises.  Our conversation brings to life Tania’s framework for the “why” of FX crisis events.  In this context, she shares her assessment of the multiple crisis events in the 1990’s, contrasting this today’s more stable emerging market FX environment.  Pointing to fixed exchange rate regimes, Tania describes the vulnerability that comes from a sudden stop of external financing after a period of excessively loose monetary policy.  The result, a balance of payments crisis that leads to a large currency depreciation and inflation shock.  We also discuss financial contagion and Tania makes the point that when countries have parallel risks, an event in one country ca

Gordy Lawrence, Director of Global Derivatives at Wellington Management, spends his days searching for value in optionality.  With a framework geared toward assessing option prices on both an absolute and relative basis, Gordy and his team support portfolio managers throughout the organization with the aim of utilizing derivatives to improve the up versus down capture profiles in portfolios.  My conversation with Gordy explores this process – how proxy hedges are evaluated based on historical performance through stress periods and how circumstances unique to a specific period might be given special consideration.  In this context, Gordy details his firm’s purchase of puts on the Euro Swiss cross in late 2014 at a remarkably low level of implied volatility, based not simply on option carry considerations but based on fundamental work and a view on the wherewithal of the SNB.  Sharing perspective on the current low level of US interest rate volatility and its divergence from the VIX, Gordy notes that with respe

Over more than two decades in markets, John-Mark Piampiano has traded his share of volatility. Managing derivative portfolios over the years from both the long side and the short side of the carry ledger and across the spectrum of listed and OTC products, John-Mark is a keen observer of change in market structure, trading technology and the provision of liquidity.  Our discussion considers the manner in which price discovery in equity option markets has evolved, now well represented on the screens through pricing engines that are entirely automated.  In this context, we explore the implications of much tighter screen bid/offers for the buy-side and sell-side alike.  Gone are the days where obvious pricing dislocations come about from concentrated option buying or selling activity in one name and one part of the vol surface.  The result, a greater degree of market efficiency and increased importance on trading technology to find and implement trades that capitalize on smaller relative pricing discrepancies.  W

Cutting his teeth on the acclaimed mortgage trading desk at Salomon Brothers in the 90’s, Troy Dixon gained an early appreciation for the speed and degree to which market liquidity can turn. Now the CIO of Hollis Park Partners, a firm he founded in 2013, Troy shares the perspectives gathered in managing complex trading risk over more than two decades in markets. We talk about his time at Deutsche Bank, where he ran the RMBS trading unit, and the intense pressure to compete in the pre-crisis period for profitability in each aspect of the mortgage lifecycle. Contemplating the asset price wreckage in the aftermath of the housing crash, Troy recounts the challenges in balancing the competing interests of providing market making services for the firm’s client base while risk managing a volatile book of prop exposures. Next, we discuss Troy’s founding of Hollis Park and the path that he has sought to provide for other professionals of color in the financial industry. In thinking back on the heavy lift he undertook,

Over her 22 years at Citi Group, Anna Raytcheva managed complex trading risks through volatility regimes both high and low. The Orange County blowup on the back of Greenspan’s surprise tightening campaign in 1994 provided Anna with an early lesson on the vulnerabilities that arise from owning exotic securities, especially when they are positioned with leverage. My conversation with Anna considers this and other prominent periods of market disruption and what they taught her about the limitations of modeling. With markets prone to risk on / risk off, Anna sought to develop trading signals using machine learning techniques to detect clues that a change in the vol regime was afoot.  Founding Sonya Capital in 2017, Anna capitalized on the perspective she gained trading through crisis periods when liquidity evaporated from markets.  As such, she constructs positions using global futures to implement a discretionary global macro strategy that takes economic data, policy changes and flows as inputs.  We finish our c

Armed with a PhD in astrophysics, Josh Younger hit Wall Street in 2010 as the embers of the Global Financial Crisis were slowly burning out. With a decade of focus on modeling interest rate derivatives and with the perspective gathered through unique fixed income risk events, Josh brings exceptional insights to our discussion. Our conversation aims to uncover the factors that contributed to the near collapse of the Treasury Market during the chaos that ensued in March of 2020. Characterizing US government bonds as the asset that became toxic to own, Josh helps us understand the manner in which post GFC regulatory initiatives combined with buy-side incentives to rent balance sheet left the UST market vulnerable to overwhelming the system’s capacity to bear risk. On the back-end of our discussion, Josh brings to life the factors that influence the supply and demand for interest rate options and the impact that certain products used by insurance companies have on long-dated implied volatility. Please enjoy this

For Jordi Visser, market crisis events inevitably result in regime shifts.  The pandemic of 2020 – a shock to the economy, deterioration in asset prices and an overwhelming response from the government and Central Bank – is no exception.  In his role as Chief Investment Officer at Weiss Multi Strategy Advisers, Jordi is dispassionate in his assessment of risk and reward, relying on hard data rather than the common narratives often proffered.  In today’s set of market prices and data, Jordi sees opportunities in that beaten down factor called value, as it is associated with cyclical industries that produce goods.  As supply chains are moving onshore, price increases are occurring as a result of production bottlenecks.  And at the same time, Jordi sees changes in demand, especially from millennials, who are shifting to consume “things” like autos and housing and focusing less on experiences in a post-pandemic world.  On balance, Jordi see relative value opportunities in value versus growth and EM versus DM. We

When it comes to obvious asset class similarities, crypto and crude might seem to have little in common.  But for Rich Rosenblum, there are linkages between them upon closer inspection.  Seeing similarities in the diversifying characteristics of both assets in broad portfolios, Rich also notes the tendency for digital assets and crude to experience phases of investment and then value extraction from that investment.  The net result is volatility.  On this episode of the Alpha Exchange, it was a pleasure to solicit the insights of Rich, the former global head of oil derivatives at Goldman Sachs and, for the last 7 years, a co-founder and head of trading at GSR Markets, focused on delivering trading and investment product solutions to the crypto space.  Our conversation explores the financial attributes of bitcoin – its correlation to risk markets, its periods of strong price momentum and how it may perform during the chaos that investors are especially worried about right now.  We also discuss the expanding ma

In the words of former FOMC Governor, Kevin Warsh, “If you’ve seen one financial crisis, you’ve seen one financial crisis”.  The uniqueness of shocks makes this so and the result is that policymakers need to constantly innovate in their response to episodes of heightened uncertainty. Now a visiting scholar at the Hoover Institute, Kevin shares with me his perspective on the pandemic of 2020, evaluating the mix of forces that brought the VIX to a new time high even as the Treasury market nearly imploded. Kevin’s experience on the FOMC during the global financial crisis has taught him lessons about the institutional realities of crisis firefighting: in the moment, a central bank may be left with few good options and be forced to use controversial measures to restore market functioning. In Kevin’s rendering, what’s more important is the set of reforms pursued by a central bank between crisis events that matters most and here the Fed may not have done enough in the decade between the GFC and the pandemic. We end

Widely considered one of the most gifted central bankers of the modern era, Raghuram Rajan is a highly prominent voice on monetary policy and the global macro economy and it was my distinct privilege to bring his insights to the Alpha Exchange.  Now the Katherine Dusak Miller Distinguished Professor of Finance at Chicago Booth, Dr. Rajan was head of the Reserve Bank of India from 2013-2016, stewarding the country’s economy and financial system through a precarious time punctuated by a violent currency sell-off and a challenging bout of inflation.  Our conversation covers monetary policy, episodes of financial crisis, the fallout from Covid-19 and that pesky conundrum, inflation.  Dr. Rajan gives the Powell Fed high marks on its forceful response to the pandemic, crediting it with staving off a self-reinforcing asset price sell-off.  At the same time, he worries that, as the Central Bank becomes more interventionist, it risks being captured by markets and will find it difficult to extricate itself from extraor

From Latin America in the 80’s to South East Asia in the 90’s, the history of emerging market dust ups is rich. And for Jay Pelosky, the co-founder and CIO of TPW Investment Management, these episodes of instability provided critical early training on the “never say never” world of EM. On this episode of the Alpha Exchange, Jay recounts his days at Morgan Stanley, trained under Barton Biggs, and responsible for allocating capital across asset classes and countries. We reminisce on the Internet bubble that imploded as the century began and pivot to today’s post Covid markets: dominated by tech, propelled by low rates and preoccupied by a certain event coming in November. Jay’s framework views the world as tri-polar, with the US, Asian and European economies vying for global leadership and with a non-consensus view that Europe may finally turn a corner. We talk as well about the sudden stop of Coronavirus and the unique way in which the asset price reaction was so immediate, leaving a backdrop of substantially

Michael Pettis is no stranger to episodes of financial crisis.  Trading through multiple Latin American debt crises in the 1980’s, the Southeast Asia currency debacle in 1997 and, in its aftermath, the capital flight that engulfed Brazil, Michael has developed a rigorous framework for the how and why of these disruption events.  Central to his approach is Hyman Minsky’s focus on the balance sheet and the relationship between assets and liabilities both for individual entities and across the system.  Driving financial fragility, in Michael’s rendering, is a specific type of mismatch in which the payments on the liability side are vulnerable to sharply increasing when conditions become less favorable.  Our conversation considers these events in the context of China, a country that Michael moved to in 2002 and has become a renowned expert on.  Seeing China on an unsustainable debt path as early as 2007, Michael argues that the conditions for financial crisis are less obvious given the closed nature of the Chines

Trading through big FX macro events in the 1990’s, Mike Novogratz is no stranger to market instability and the Central Bank response that is ultimately required to restore order. Our conversation is a retrospective on the long ago period when firmly positive interest rates were a thing and when market prices were discovered through supply and demand. In Mike's rendering, today's world looks a lot different. Central Banks have taken an increasingly activist role in guiding interest rate markets and preventing unwind events from becoming self-reinforcing. The result, stable prices in some asset markets but increasingly speculative characteristics in plain sight in others. Our conversation covers a lot of ground, and Mike has much to say about bonds, bubbles, bitcoin and even bail. About the latter, he has founded the "bail project", a passionate effort focused on creating a more humane pre-trial bail system. Lastly, we discuss Mike's founding of Galaxy Digital Holdings and his investments in various aspects of

Within financial markets, derivatives have always been the stomping grounds of those inclined to entertain probabilities and models.  Delving further within this space, you will find simpler vanilla products like listed options but also a realm of considerably greater complexity where counterparties engage in the transfer of alternative risk exposures.  For French banks like BNP, derivatives innovation  has always been an important part of the value proposition.  And as Head of Sales for the Americas at BNP, Nathalie Texier Guillot has been a driver of the bank’s mission to help clients solve complicated problem.  My conversation with Nathalie considers the current state of the risk recycling business in light of the explosion of volatility during March of 2020.  She provides insights on the need to properly size trades, her observations on dislocations that emerged earlier this year and the types of trades she and her team are spending time on now.  We also discuss the challenges in leading a team during the

As our crisis series of the Alpha Exchange continues, I was pleased to have the opportunity to engage with Jens Nordvig, the founder and CEO of Exante Data.  After stints at both Goldman Sachs and Nomura, Jens launched his independent firm in 2016 with an eye towards using a highly data driven approach to help institutional clients make sense of global economic developments and position portfolios accordingly.  Our discussion focuses broadly on the notion of nonlinearity as it applies to asset markets, a key part of the investment philosophy Jens utilizes to evaluate risk and highly applicable to the current landscape of virus centric uncertainty.  Harnessing new and extremely real-time data sets, Exante Data was decidedly early in understanding that Covid19 was going to be a big deal, globally, and that markets were failing to appreciate the risks.  This disconnect and the potential troubles that lie ahead owe to the difficulty in appreciating the growth in processes like a virus that are exponential in natu

The explosion in market volatility that resulted from the Covid crisis was all-consuming in March.  Massive one-day moves in broad equity indices, correlations that approached 100% and a breathtaking crash in the price of oil were factors that left investors unable to consider much more than the wreckage in front of them.  But for Jake Doft, the founder and CIO of Highline Capital, the crisis has provided a truly unique opportunity to step back and contemplate change and the investable implications thereof.  The crisis has forced businesses and consumers to adapt, not just accelerating trends already in place, but also providing exposure to new technologies, new approaches to supply chain management, new ways to interact socially and potentially new preferences on where to live.  My discussion with Jake is a compelling look into how an investor can “skate where the puck is going to be”, evaluating the long term opportunities that emerge from this challenging time.  I hope you enjoy this conversation as much a