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January
02
2019

One River Asset Management: "QE Has Done Something Much More Damaging Than The Fed Could Have Imagined"
Lindsay Politi

Ghosts of Investments Future 

"I think of the markets like an ecosystem," the fund manager told me.

"The environment causes some strategies to flourish and multiply, while others die off. The abnormally long, QE-fueled bull market killed off anything that wasn't, at its core, a short volatility strategy. Now, whether it's risky credit, levered equities, or risk parity, almost all strategies are taking similar risks. QE has done something much more damaging than the Fed could have imagined. It changed the very nature of the market, destroying the diversity of the market ecosystem, and making it incredibly vulnerable to the smallest change in the macro environment."

Yields

"Bond guys think they know what they want, but they're wrong," my first boss told me. "They think they want lower yields because they drive up bond prices. But that's a short-term gain collected at the expense of future returns. Client inflows surge, chasing those high returns, but they're not repeatable unless yields continue falling. What bond guys should really want is high yields, the kind that create long term returns that are attractive to clients. Rising rates are painful in the short-term but higher rates are better in the long run."

Fed Put

"Why did Powell reset the Fed put lower?" he asked "I don't think Powell saw it that way," I responded, "but I'm surprised people think a central bank put still exists."

If we have a recession with overnight rates still at 2.50%, what can the Fed do? They can't ease 500bps like in past recessions, there's no room. Coordinated easing with the ECB and BOJ is off the table -- their rates are negative and they're running out of assets to buy for QE. At least the Fed won't have that issue. With surging budget deficits, the Fed will have plenty of Treasuries to buy. And that's only just begun, because the next put for the markets is really from fiscal, not monetary policy.

Assume

"What do you think about big data models?" the analyst asked. "There's a fascination with having ever more data, but quantity can't make up for quality," I responded. Some things are easy to model but others are much harder because there's just not good data. Anyone can build a decent model with great data. The hard part is knowing what to do with bad or incomplete data. The hardest yet is knowing when to pull your model because the data it was built with isn't representative of the current environment.

How would you build a robust model for a bond bear market? There's just not great data. Most quants compensate by creating a data series and then treating this made-up data as real. But to create a data series you must make assumptions. Success will come not to those who build the best machines but to those who make the best assumptions.

Founded in 2013 by Eric Peters, One River Asset Management is an innovative investment manager dedicated to delivering high-conviction absolute-return strategies that help our clients build superior portfolios. We see the world in a period of major economic and political transition, with the investment landscape shifting in ways that will make the coming five years look profoundly different from the past five. Our strategies are built to profit from this dynamic environment while providing strong diversification benefits to traditional investment portfolios. Each is developed and managed in-house by our diverse team of investment professionals with deep expertise in volatility, thematic macro, systematic, and inflation trading/investing. Our strategies are delivered at sensible fees and enhanced volatility via commingled funds, and/or in bespoke combinations for large institutions via fund-of-one structures.

www.oneriveram.com