The Alpha Exchange is a podcast series launched by Dean Curnutt to explore topics in financial markets, risk management and capital allocation in the alternatives industry. Our in depth discussions with highly established industry professionals seek to uncover the nuanced and complex interactions between economic, monetary, financial, regulatory and geopolitical sources of risk. We aim to learn from the perspective our guests can bring with respect to the history of financial and business cycles, promoting a better understanding among listeners as to how prior periods provide important context to present day dynamics. The “price of risk” is an important topic. Here we engage experts in their assessment of risk premium levels in the context of uncertainty. Is the level of compensation attractive? Because Central Banks have played so important a role in markets post crisis, our discussions sometimes aim to better understand the evolution of monetary policy and the degree to which the real and financial economy will be impacted. An especially important area of focus is on derivative products and how they interact with risk taking and carry dynamics. Our conversations seek to enlighten listeners, for example, as to the factors that promoted the February melt-down of the VIX complex. We do NOT ask our guests for their political opinions. We seek a better understanding of the market impact of regulatory change, election outcomes and events of geopolitical consequence. Our discussions cover markets from a macro perspective with an assessment of risk and opportunity across asset classes. Within equity markets, we may explore the relative attractiveness of sectors but will NOT discuss single stocks.
Jared Dillian, Editor, The Daily Dirtnap
52:41In 2008, as the global financial crisis unfolded and his employer, Lehman Brothers, descended into bankruptcy, Jared Dillian decided to go it alone. An ETF market maker with a gift for writing, Jared launched the Daily Dirtnap, a newsletter focused on identifying market themes and actionable trade ideas. Thirteen years and 3,000 publications later, the Dirtnap is widely enjoyed by a loyal readership finding value in Jared’s unique insights. Our conversation is one part retrospective, exploring the fast days of the pre-crisis period when Jared committed risk capital at Lehman, locking ETF markets in pursuit of buy-side commission business. In the process, we get a window into the formation of the Dirtnap, that being his daily client communications over Bloomberg while at Lehman. We also discuss Jared’s active imagination and love of writing, learning more of his fiction book, “All the Evil of this World”, built around the Palm/3Com pricing dislocation.Lastly, we talk macro markets, covering gold, inflation and energy. With gold, Jared takes a contrarion and bullish view, seeing the vastly negative sentiment on Twitter as an ultimate upside catalyst and also placing value in the low correlation that gold has with risk assets generally. I hope you enjoy this episode of the Alpha Exchange, my conversation with Jared Dillian.
Campbell Harvey, Professor of Finance, Fuqua School of Business, Duke University
1:01:12Our conversation focuses on his current work as an Investment Strategy Advisor at Man Group where he has done work on the idea of crisis alpha: strategies that can effectively offset portfolio losses suffered during risk-off events. Campbell and his colleagues find that both time-series momentum as well as a long/short portfolio focused on the quality factor both have insurance-like characteristics and can be valuable overlays for equity portfolios. He also shares his work on rebalancing, where he sees alpha destruction if done in traditional form, but the opportunity for much greater efficiencies by incorporating some of the findings on time-series momentum. Lastly, we discuss Campbell’s new book, “DeFi and the Future of Finance”. As the title may imply, he’s bullish on the breathtaking pace of innovation in the financial services industry. I hope you enjoy this episode of the Alpha Exchange, my conversation with Campbell Harvey.
Victor Haghani, Founder and CIO, Elm Partners
57:01Graduating from the London School of Economics in the mid 80’s, Victor Haghani set sail on a career in the fixed income markets. Joining Salomon Brothers and assuming a position in bond portfolio analysis, Victor became steeped in the math of bond markets and derivatives and part of a team that sought to conquer markets with science. He was among those who joined John Meriwether in the founding of Long Term Capital Management in 1993 and as a Partner experienced directly both the early spectacular success and the ultimate failure of the fund. Our conversation considers the lessons – on market liquidity, reflexivity, and trade sizing as well as the vulnerability of relative value trades to errant correlation assumptions. By 2002, Victor took up the “the case of the missing billionaires”, wondering why there were so few now given that so many individuals had over a million dollars a century ago. He set out on a journey of inquiry focused on finding an asset allocation strategy that could preserve and grow wealth over time. Today, that work has come to life at Elm Partners, an asset management vehicle that Victor founded in 2011 and serves as CIO of. We discuss the premise of Elm – that passive indexation is generally effective but can be improved upon. In this context, Elm employs “dynamic index investing”, looking beyond market cap weighting to incorporate economic fundamentals like earnings yield and factors like value and momentum. With this approach, Victor and team hope to avoid busts that periodically occur while remaining exposed to the market such that wealth can compound over time. I hope you enjoy this episode of the Alpha Exchange, my conversation with Victor Haghani.
Barry Knapp, Founder, Ironsides Macro
59:28For the landscape of elevated asset prices that defines today, nothing may be more consequential than changes in the inflation outlook. And for Barry Knapp, the founder of Ironsides Macro, the Fed is off-track with respect to its understanding of inflation in a post-pandemic world. While the Covid shock brought market volatility comparable to the breathtaking levels experienced during the GFC, the inflation aftermath of these two crises could not be any different. In Barry’s rendering, while the GFC left household and financial sector balance sheets in disarray amid a damaged credit channel, consumer leverage is extremely low and lending is unimpaired in the post pandemic period. By crafting today’s policy as a function of the disinflationary decade post 2008, the Fed also fails to account for the positive supply shock in energy that was the Shale revolution as well as the decades long period of goods disinflation that resulted from China’s admission to the WTO. The result, especially as supply chains are being restructured, is the risk that the Fed runs consistently behind the curve over the coming year. As our discussion continues, Barry shares his views on the inevitability of a risk-off resulting from the Fed’s attempt to normalize policy, a consequence of the degree to which market prices have become increasingly sensitive to even small policy changes in the post-QE era. I hope you enjoy this episode of the Alpha Exchange, my conversation with Barry Knapp.
Subadra Rajappa, Head of US Interest Rate Strategy, Societe Generale
45:12With a position in rate strategy at Salomon Brothers in the late 1990’s, Subadra Rajappa developed an early appreciation for how market risk can be transmitted from one part of the world to the other through the 1997 Asian FX crisis and the LTCM debacle a year later. Over the course of a career spanning more than 25 years, she’s developed a macro framework that is underpinned by an assessment of growth and inflation variables that help drive interest rate fair value models. Derivative market pricing and fund flows also make their way into her framework. Specifically, Subadra looks at the interest rate vol surface with special attention to the price of out of the money options, and, to track the money, keeps an eye on positioning in futures markets. Our conversation considers key recent events that shape where we are in the monetary policy cycle. In this context, Subadra shares her views on the integrity of market pricing signals amidst the large participation of the Fed in the market. We also explore inflation and here Subadra points out that while some components of the rise in inflation will be transitory, others, like wages, tend to be more persistent. A vulnerability that results is a the potential of a less market friendly Fed in 2022. Lastly, I solicit Subadra’s perspective on the degree of progress in promoting the career growth for women in finance. To this, she sees more attention to recognizing women and hiring them but there remains a lot of work to be done on the retention front. I hope you enjoy this episode of the Alpha Exchange, my conversation with Subadra Rajappa.
Denise Chisholm, Sector Strategist, Fidelity Investments
52:23If you asked yourself, “what are the odds?”, Denise Chisholm can probably tell you insofar as market outcomes are concerned. A Sector Strategist at Fidelity Investments, Denise leverages historical data as part of a probability framework that helps her evaluate risk and opportunity in the equity market. Our conversation explores episodes when her process uncovered overlooked relationships that were hiding in plain sight. During the GFC, for instance, Denise connected faltering housing prices with default implications on Country Wide’s mortgage portfolio. Her work on probability is sometimes multi-layered. For instance, in evaluating the reaction of the long end of the yield curve to Fed tightening cycles, Denise found that conditional on the Leading Economic Indicator Index falling the 10 year yield increased only 30% of the time when policy was tightened.More currently, we discuss what Denise sees in markets today. Here she observes a strong recovery in wages from the Covid bottom as correlated to outperformance of cyclicals over defensive. Lastly, she shares a strong view on the energy sector linked to a combination of low capital spending and high free cash flows. As we round out our discussion, I solicit Denise’s views on the state of progress for women in the field of finance. And here, unsurprisingly, she’s focused on the numbers, viewing plenty of upside in the 20% of women that comprise senior leadership roles in financial services. Progress here can result from showing women at a young age just how interesting and rewarding a career in finance can be. I hope you enjoy this episode of the Alpha Exchange, my conversation with Denise Chisholm.
Jeff deGraaf, Founder and CEO, Renaissance Macro
53:06For Jeff deGraaf, financial markets have always been about figuring out who moved the pieces in a chess match and why. Early exposure to the discipline of technical analysis and its focus on prices and probabilities helped Jeff begin to develop a framework that concentrates on finding bets with favorable odds. Our discussion considers the market events that have played a formative role in how Jeff thinks about risk. Particularly influential among the big risk-off events was the LTCM debacle, especially as it illustrated the power of the Fed to bring an end to a de-risking process.A decade after founding Renaissance Macro in 2011, Jeff and his team continue to view the policy response as both inevitable and critical and in this context, we discuss the evolution of the interaction between markets and the Central Bank. Today’s much more activist Fed is one example of how historical pricing relationships, while a valuable tool to understand the present, must be interpreted with care. The shifting correlation profile of the Treasury market to various segments of the equity market is a ready example of this change. For Jeff, predicting the future is difficult and time is better spent on the study of price. Here, his process leads him to a lengthy checklist of indicators that allow the market to speak. And while, in his words, the market "fibs often", a wide enough swath of charts across asset classes and geographies is bound to provide clues on where both value and vulnerability are hiding.Lastly, we talk about life on the sell-side and Jeff's perspective on running a client centric business through the pandemic. Here, the take is an optimistic one with Jeff and team deriving value from connecting with clients virtually in order to deliver insights in an efficient manner. I hope you enjoy this episode of the Alpha Exchange, my conversation with Jeff deGraaf.
Peter Cecchini, Head of Research and Strategy, Axonic Capital
54:33Initially trained as a lawyer and consultant, Peter Cecchini's career spans a few decades across the buy side and sell side, focused on both bottoms up and top down analysis of risk and opportunity. Now the head of research and strategy at Axonic Capital, Peter shared his insights on the Merton model and the linkages between credit spreads, stocks prices and asset volatility. In the context of this discussion, we explore episodes of dislocation between equity and credit markets, how to spot them and the implementation of trades to capitalize on them. In Peter’s view, the better risk signal has traditionally emanated from the credit markets where bondholder obsession with being paid back dominated the sometimes lofty upside scenarios entertained by equity market investors. Over time, however, the degree to which the equity cushion has risen so markedly may lead to credit market complacency, leaving Peter sometimes more focused on stock price fluctuations as the cleaner risk signal.Our conversation, of course, covers the Fed and it’s ever increasing interactions with market prices. We consider the hard to ignore breakdown between nominal interest rates and the concurrent inflation and here Peter believes the Fed is in quite a difficult spot. Inflationary periods, in Peter’s view, result from inorganic demand surges, coupled with supply disruptions and a burst in M2. On these three metrics, the risk that today’s strong recent price increases may not be entirely transitory is real. Lastly, we touch on the Meme stock craze and Peter shares his work on opportunities in the capital structure in AMC. I hope you enjoy this episode of the Alpha Exchange, my conversation with Peter Cecchini.
Rick Bookstaber, Founder, Fabric RQ
54:14Few professionals have the depth of perspective on the many market risk events that were missed by the models as Rick Bookstaber. Trained at MIT where he received a PhD in economics, Rick would become Morgan Stanley’s first risk manager in 1984. There, and also at Salomon brothers, Rick was among the quants on Wall Street that developed early pricing models for interest rate derivatives. In this capacity, he had intimate knowledge of the challenges that complex products created for dealers looking to hedge them. And related to this, he also had a front row seat to the early debacles of modern markets including the crash in 1987 and the LTCM unwind in 1998. Across two excellent books, Demon of Our Own Design and End of Theory, Rick explores the characteristics of markets that make them inherently fragile, including the notion of tight coupling. Here, feedback between trading, price changes and subsequent trading based on the price changes can give rise to instability. Today, Rick is the founder of Fabric RQ, a firm delivering risk management solutions to the RIA community. Among the issues Rick worries about today include SPACs, NFTs and the concentration of richly valued tech stocks in indices like the S&P 500. I hope you enjoy this episode of the Alpha Exchange, my discussion with Rick Bookstaber.
Simon Ho, Founder and CEO, T3 Index
49:09With many years experience trading and risk managing derivative exposures, Simon Ho is now the founder and CEO of T3 Index, a financial research and technology firm doing some interesting work in the arena of complex index and product construction. An avid user of VIX products during his time on the buy-side, Simon loved everything about the CBOE suite of vol products but the cost to use them. He set out to create a similar, but more economical product that could compete for the growing user base of investors who sought direct exposure to volatility. With this, SPIKES was born and so too began the journey for Simon and his team to bring a new volatility option and futures product to the market. Next, we explore the newest creation from T3, the BitVol index. Recognizing the interest from investors in trading volatility directly, Simon sees promise in an index that gives end users direct access to implied volatility in Bitcoin. While exploring this, we discuss the characteristics of vol surfaces for assets like Bitcoin, drawing similarity to gold and volatility itself. Lastly, Simon is excited about T3’s work on interest rate volatility, having developed an index he hopes will become a leading instrument to manage risk in this important asset class. I hope you enjoy this episode of the Alpha Exchange, my conversation with Simon Ho.