Alpha Exchange

In this discussion, I make the case for tail hedging. I communicate two main ideas. First, I lay out the concept of the “fourth type of risk off”, an episode that features instability in the back end of the US bond market. As I’ve said, nothing can really work in markets if the Treasury market does not. Count me as worried that the US fiscal issues are incredibly difficult to solve – we wouldn’t be here otherwise – and that the timeline to address them has shortened.

Second, I argue that the US economy and market are far too exposed to the AI capex trade. There are various correlations that emerge, two of which are among the companies in the value chain and between the economy and the market. The AI buildout is demanding capital that is likely putting upward pressure on real rates. A prospective homebuyer may certainly find a 7% mortgage rate restrictive. A hyperscaler chasing AI gold may not find the current cost of debt capital restrictive at all. If getting inflation to target means slowing this capex materially, leading to a meaningful decline in the equity market, there could be substantial knock-on impacts via the wealth effect and an economy which has gathered so much beta to ongoing capex.

These concerns are set against some of the lowest prices for financial market insurance we have seen in a long time. I find tremendous value in long optionality. Buckle up. The midterms are coming, monetary policy is in flux, the back end of the yield curve is wobbling, the AI trade is way too concentrated, and implied volatility is quite low.

I wish you a wonderful holiday weekend and thank you for listening.

I really enjoyed hosting this Alpha Exchange discussion with Ulrike Hoffmann-Burchardi, CIO for the Americas and Global Head of Equities at UBS Global Wealth Management. Ulrike has had a long career in markets, having spent nearly 25 years at Tudor Investment Corporation working across quantitative macro and global tactical asset allocation before joining UBS.

We begin with Ulrike’s academic background in economics, political science and financial econometrics and the path that ultimately brought her from academia to Tudor. She reflects on the culture created by Paul Tudor Jones and several lessons that stayed with her throughout her career: the importance of respecting trends, sizing positions appropriately, understanding liquidity and recognizing that while markets continually evolve, the human emotions driving them remain remarkably consistent.

We then turn to portfolio construction at UBS, where Ulrike and her team combine three distinct lenses: macro, bottom-up fundamentals and structural trends. Within that structural framework, they are focused on three transformational opportunities—artificial intelligence, power and resources, and longevity. We discuss how AI connects all three and why the enormous capital expenditure associated with its development is increasingly becoming a macro factor in its own right.

Ulrike walks us through the potential bottlenecks to the AI buildout, from electricity and grid capacity to permitting, turbines and transformers, as well as the possibility that monetization fails to keep pace with investment. We also explore opportunities across the AI value chain, including semiconductors, power, industrials, materials and healthcare.

Lastly, we discuss hidden correlations and why portfolios that appear diversified across traditional asset classes may share common underlying exposures.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Ulrike Hoffmann-Burchardi.

The IMF’s Global Financial Stability Report is a twice yearly, must read. Leading the excellent research done here is Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department at the IMF. It was a pleasure to welcome Tobias to the podcast to explore the IMF’s financial stability framework, vulnerabilities in global markets, and the evolving risks shaping the financial system.

We begin with Tobias’ role and the evolution of the GFSR, which combines market intelligence, analytical research, and a framework for assessing financial vulnerabilities. He explains how the report has shifted alongside the macro backdrop, from an environment defined by low inflation and negative-yielding debt to one characterized by higher inflation, tighter financial conditions, and geopolitical uncertainty.

A central theme throughout the conversation is the distinction between forecasting shocks and identifying vulnerabilities. Tobias describes how the IMF focuses on leverage, maturity transformation, valuation, currency mismatches, and interconnectedness rather than attempting to predict the next catalyst. The discussion explores how these vulnerabilities can amplify the effects of unexpected shocks across financial markets.

We then turn to several themes from the most recent GFSR. Tobias discusses artificial intelligence as both a driver of investment and productivity while examining the financial linkages, capital spending, and interconnectedness developing across the AI ecosystem. He also outlines the IMF’s assessment of sovereign debt, rising term premiums, and the growing role of non-bank financial institutions in financing global markets.

The latter part of the discussion focuses on market plumbing, including leverage in hedge funds, Treasury basis trades, derivatives markets, and the challenges of monitoring system-wide positioning. Tobias explains how liquidity, options markets, and quantitative strategies can contribute to vulnerabilities that become apparent during periods of market stress.

I hope you enjoy this episode of the Alpha Exchange, my conversation with Tobias Adrian.

It was a pleasure to welcome Jon Havice, Founder and CIO of DGV Solutions, back to the Alpha Exchange. Our conversation explores systematic investing, volatility risk premia, and portfolio construction for institutional investors.

 

We begin with Jon's path from trading currency options and derivatives at O'Connor and UBS through hedge fund management and investment consulting before founding DGV Solutions. He reflects on advising endowments, foundations, and healthcare systems, and explains how those experiences shaped a philosophy centered on delivering liquid, systematic investment strategies designed to help institutions pursue long-term objectives while managing downside risk.

 

The discussion focuses on DGV's approach to accessing equity beta through a collateralized put-write strategy. Jon discusses the volatility risk premium as a persistent feature of options markets, comparing it to traditional insurance markets where investors are willing to pay for downside protection. He explains how systematic option-writing seeks to capture that premium while emphasizing disciplined risk management, position sizing, and maintaining sufficient collateral through changing volatility regimes.

 

We then broaden the conversation to the firm's suite of strategies across asset classes. Jon outlines how DGV applies carry, value, momentum, and trend factors differently across equities, foreign exchange, and commodities, noting that each market exhibits distinct characteristics that influence which factors have historically been most effective. Examples include combining value and carry in developed market currencies and pairing carry with momentum in commodity markets.

 

The latter part of the discussion focuses on portfolio construction, leverage, and risk management. Jon explains why DGV places significant emphasis on stress testing, limiting leverage, and maintaining control of portfolio positions through periods of market stress.

 

We conclude with Jon's perspective on diversification, artificial intelligence, passive investing, and structural changes across financial markets that continue to influence institutional portfolio management.

 

I hope you enjoy this episode of the Alpha Exchange, my conversation with Jon Havice.

It's been a busy year for the Alpha Exchange podcast — 25 episodes so far and an exciting fall schedule ahead. Today I'm going solo, assessing a backdrop for market risk that has proven quite unique this year. In the discussion that follows, I want to share what's on my mind with respect to the prices we all stare at every day, and tie together three crosscurrents that look separate on the surface but are really one story. These themes are low correlation, spot up vol up dynamics, and the cheapness of market-based insurance.

 

First, correlation. Realized and implied correlation among S&P stocks have fallen to levels never seen before — one-month realized printed 0.4% in late July — and that's pinning index vol to the floor even as the stocks inside get more volatile. On the second front, a meaningful cohort of stocks are experiencing massive returns, and, atypically, seeing their options become more expensive at the same time. This is amplified by leveraged ETFs and there are unique implications for risk and trade construction.

 

Lastly, I argue that the price of insurance across equities, rates, FX and credit is exceptionally low relative to the vast uncertainty in markets, technology, and global affairs. If anything, the already rapid pace of change is only set to accelerate from here. It’s a good idea to accumulate shock-absorbing options at low prices during sunny days. They will come in handy when the inevitable risk-off occurs, which I see as an underpriced scenario.

 

I hope you find this interesting and useful. Thank you for listening.

 

Editing and post-production work for this episode was provided by The Podcast Consultant (⁠https://thepodcastconsultant.com⁠)