Alpha Exchange

Tony Morris, Global Head of Quantitative Strategies at Nomura International, has spent 25 plus years studying complex market pricing relationships across asset classes, with a focus on derivatives. Our conversation explores some of the factors that drive asset price outcomes, first, considering the vol risk premium. Observing the consistent shortfall of realized versus implied vol in the equity market, Tony details a similar circumstance in credit where realized defaults are lower than implied by spreads. He suggests that the existence of both the equity VRP and the credit risk premium are tied to fact that both have beta to the SPX, which in turn enjoys its own risk premium.Our conversation shifts to the work that Tony and his team are doing within the larger Quantitative Investment Strategies, or QIS, business at Nomura. We touch briefly on the history of QIS, a business motivated by end user interest in systematic strategies that require substantial market access, modelling and operational infrastructure.

Welcome to a special Alpha Exchange Retrospective podcast in which I highlight discussions with female guests and their reflections on efforts to empower careers for women in the field of finance. I launched the Alpha Exchange back in 2018 to host conversations with prominent investors, strategists and policymakers that explored the world of market risk. Over the course of these last 5, most interesting years, I’ve been fortunate to engage with 135 individuals, soliciting their perspectives, uncovering their frameworks and asking them to detail the lens through which they evaluate the trade-off between risk and opportunity. Among my guests, 22 have been women. I’m pleased to say that 2023 is already a record year for female guests at 9. These guests are chief investment officers, heads of derivative strategy, hedge fund founders, heads of asset allocation and macro credit research. Female guests of the podcast are, almost always, mothers as well.I enjoyed putting this together, hoping to highlight what leadin

Game 5 of the 1973 NBA finals would be the last one played by Wilt Chamberlain, as the Lakers lost to a NY Knick team that featured basketball legends Walt Clyde Frazier, Earl the Pearl Monroe and Willis Reed. A fourth hall of famer, Dave DeBusschere, donning the number 22, also played an instrumental role in what was the last championship for the Knicks. 50 years later, his son, Dennis DeBusschere, is a co-founder and the Chief Market Strategist at 22V Research, a firm advising institutional clients on risk and asset allocation.My conversation with Dennis explores his process for uncovering the interaction between the economy, inflation and the Fed’s reaction function. He emphasizes the importance of the financial conditions channel, asserting that economic growth that proves too resilient will force the market to ultimately confront policy that is higher for longer.  A large part of our conversation is around the linkages that Dennis and his team find in various equity factors to macro variables like the sh

Over a distinguished 40-year career as an academician in finance, Darrell Duffie has made important contributions to our collective understanding of how markets work. Earning a PhD from Stanford in 1984, Darrell has taught finance there ever since and now serves as the Adams Distinguished Professor of Management and Professor of Finance at the Graduate School of Business. Along the way he has written several books, authored countless papers and provided guidance to policymakers who have sought his counsel in addressing complex regulatory questions.We review some of Darrell’s research over the past 4 decades, starting with equilibrium models of asset pricing in the 80’s, termstructure models in the 90’s and work on default correlation post the GFC. We spend most of our time on his recent research on the US Treasury market, that risk-free asset class that recently appears anything but. Darrell shares some conclusions from analysis of the melt-down of the bond market in March of 2020 and the policy implications

As head of Macro Credit Research within Private Markets at BlackRock, Amanda Lynam is responsible for assessing how the broad picture of risk impacts credit markets and the securities within them. In doing so, she marries the top down with an understanding of company fundamentals, a skillset developed during her time in a sell-side research role focused on the insurance and healthcare sectors. Our discussion takes stock of the current opportunity set in corporate credit, exploring Amanda's process for finding value amidst an environment of middling credit spreads, but high all-in yields. As most of the heavy lifting is currently being done by the risk-free component, her team sees this continuing, with a view that the bar is high for Fed rate cuts well into 2024.Expecting a higher cost of capital to prevail for some time, Amanda expects more dispersion of returns across issuers in credit, with a view that certain capital structures that added considerable leverage when rates were low will struggle as they ult

As Chief Investment Strategist at iCapital, a global alternatives platform, Anastasia Amoroso is responsible for helping the firm’s clients understand changes in the macro regime and how capital should be allocated in response. We start our discussion by considering the current state of affairs – of high interest rates, of correlated moves in stock and bond prices and resilient economic growth – and exploring where history is and is not relevant.Here, Anastasia highlights the degree to which both consumers and corporations are far less sensitive to interest rate increases than they were in the pre-GFC era. Higher rates are a concern, but they need not derail the case for risk assets like stocks which have delivered good returns amidst higher rates in the past. For Anastasia, an instructive framework for evaluating opportunity is one that considers valuation, positioning and a catalyst. And in the context of this last factor, she notes favorable earnings revisions which are showing signs of recently bottoming

Armed with a PhD in economics, Torsten Slok spent several years at the OECD, doing deep dive analysis and making policy recommendations on big picture issues such as pension reform, tax systems and health care policy, before ultimately hitting Wall Street. He spent more than 15 years on the sell-side, a period that included the GFC and Pandemic and the lean rate years between them.Now a Partner and Chief Economist at Apollo Global Management, Torsten is providing input on the macroeconomic backdrop and the implications for the firm’s investments. Our discussion primarily considers the joint states of the economy and inflation - where we’ve been, where we’re headed and the read through on Fed policy. On the economy, Torsten suggests that in this cycle, the transmission of changes in monetary policy to the real economy is especially lagged as both individuals and corporates have largely shielded themselves from rate increases.On inflation, Torsten describes the ebbing and flowing of goods versus services inflat

An undergrad econ major, Cameron Dawson got hooked on markets early, taking a class on securities and portfolio analysis in Business School which set her down the path of market study. She broke into the business as an industrials analyst on the buy-side, time that gave her an opportunity to develop an appreciation for how the macro landscape intersects with the micro business fundamentals within a cyclical universe of stocks.In this context, we review the period from 2014 to 2016, a time of ebullience within the energy sector and a fracking supply boom. For Cameron, there are important lessons to be had in observing the speed with which this optimism gave way to a protracted downcycle by late 2014. And, in sharp contrast, when the sector appeared un-investable in early 2016, the stocks would turn, discounting the improving fundamentals that would only be visible by late 2016. Here, she sees lessons with how forward looking the market can be, noting that if you weren’t there early, you missed it.We talk about

With a penchant for math and a degree in biology from Cornell, Dave Rogal landed at BlackRock in 2006. With the housing bubble in full sway, he was part of a group that provided asset liability management advice to large institutions. Three years later, as the dust settled from the financial crisis, he joined the fixed income division, mentored by industry experts, and quickly exposed to the world of pricing dislocations that populated the system well into 2009.Now the head of Total Return and Inflation Portfolios, Dave shares some of the lessons learned on risk management through crisis periods. Reflecting on vol events like the Covid market shock, he asserts that simplification of exposures is critical as correlations can become unstable and unreliable. We spend most of our time learning about Dave’s framework for thinking about inflation, a variable he suggests must be approached with humility. On a forward-looking basis, he sees disinflation in autos, a component that was hot, but is now starting to feel

To be sure, factor investing has been a thing in equities for some time now, with vast pools of capital managed by firms that employ a systematic approach to harvesting style factors like growth, value and momentum. In 2013, Asness, Moskowitz and Pedersen authored, “Value and Momentum Everywhere”, for the Journal of Finance, finding common factors in return attribution across 8 markets.Still, a decade later, fixed income factor investing is a nascent strategy. Enter Karishma Kaul, Head of Systematic Fixed Income Strategies at Fidelity. With a masters in financial engineering from Cornell, she hit Wall Street in 2008, landing on a fixed income desk the day of the Lehman Bankruptcy. The ensuing financial crisis would provide valuable lessons on the limitations of theoretical models and the pitfalls that potentially arise from back-tests.Our discussion shifts to fixed income factor investing. Karishma provides an overview of common factors, including value, momentum and quality. The latter, she argues can play a

Welcome to a special retrospective edition of the Alpha Exchange, narrated by yours truly. I’m a big fan of consequential events in market history as they provide a great opportunity to learn about the conditions under which asset prices can become unruly.Are there commonalities in these episodes that might allow us to develop a roadmap for why, how and when they might occur?  From a risk management perspective, what are the key lessons of vol events?In this context, it’s difficult not to reflect on the nearly unmanageable unwind of Long Term Capital that occurred 25 years ago. Over the next 50 minutes or so, I set out to take you through some of this important event from my own perspective and along the way bring in insights shared by guests of our podcast. I hope you enjoy it.

For Kristy Akullian, an interest in economics during college was motivated by a need to learn about personal finance in order to make budget each month with student loans and other expenses. After a short stint at a boutique RIA, she joined the iShares division within BlackRock, where she is now a Senior Strategist supporting the firm’s clients on asset allocation.Our conversation explores the development of ETF technology over the years and Kristy’s time as part of the delta one initiative in expanding the universe of investors in the product. Here we learn about her desire to be “in the weeds” on margin, clearing, taxes, dividends and funding in access products that enable synthetic replication.We spend the balance of the conversation exploring Kristy’s role as Senior Investment Strategist and the analysis of flows and positioning that constitutes a portion of her framework. She sees extended positioning in futures contracts on broad indices like the S&P and NDX as a reason for caution. She notes, howev

With more than two decades of experience trading and managing risk in sell-side and buy-side roles, Mimi Duff has learned a thing or two about high finance. In the early 1990’s she cut her teeth writing research for agency and treasury securities at Goldman Sachs. She’d later move to trading, focused on making markets in the long end utilizing a framework for the relative value of securities across the curve.We review some of the prominent risk events she’s traded through including September 11th and the reverberations of volatility in market prices that resulted. Mimi makes the point that the emotional response to an event so tragic tests a trader’s capacity to manage risk. We also explore the GFC and the front row seat that Mimi had to this event. Running the swaps trading desk at Barclays, she was responsible for the interest rate exposure that came about through the Lehman acquisition, calculating first and second order risks and then implementing a hedging program in the market.Our conversation moves to

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 investor

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 tha

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

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 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