Capital Allocators – Inside the Institutional Investment Industry
Episode Summary: Eric Peters - Paradigm Shifts and Solutions at One River (EP.422)
Release Date: December 16, 2024
Host: Ted Seides
Guest: Eric Peters, Leader at OneRiver Asset Management and Coinbase Asset Management
1. Introduction to Eric Peters
Ted Seides welcomes Eric Peters back to Capital Allocators, highlighting his leadership role at OneRiver Asset Management and Coinbase Asset Management. Eric is recognized for his comprehensive macro insights shared through his blog, Weekend Notes, and his previous discussions on bespoke macro investment strategies and Bitcoin.
2. Navigating Structural Changes in the Investment Landscape
Timestamp: [05:39]
Eric Peters begins by reflecting on the transformative period starting in 2020. He notes the unforeseen impact of COVID-19, which acted as a catalyst, accelerating themes like big fiscal deficits, monetary debasement, and inflation. This environment forced OneRiver to reassess and adapt their investment strategies significantly.
“Our business has gone through a lot of change. 2020 is the place to start...Big fiscal deficits, monetary debasement, inflation. And that provoked all sorts of changes in how we thought about our business and our solutions.”
— Eric Peters, [05:48]
3. OneRiver’s Evolution and Current Strategy
Timestamp: [07:55]
Today, OneRiver stands as a $3 billion asset management firm primarily focused on risk mitigation. Their portfolio predominantly comprises trend following and volatility strategies, alongside a dispersion strategy. Eric emphasizes OneRiver's approach of offering a total portfolio solution rather than launching a single flagship strategy.
“One River is about $3 billion business and it's primarily focused on risk mitigation... our strategies are negatively correlated, positively convex.”
— Eric Peters, [07:55]
4. Shifting to Systematic Strategies
Timestamp: [13:09]
Transitioning from discretionary to systematic strategies, Eric discusses the rationale behind embedding technology within OneRiver. This shift aimed to eliminate emotional biases in investing and enhance risk management. Systematic strategies offer capital efficiency, scalability, and the ability to apply consistent investing principles across diverse markets.
“If we could embed discretionary investing principles...and take out the emotion from investing, build really well risk managed quantitative strategies...”
— Eric Peters, [13:09]
5. Integrating Long Volume and Trend Strategies
Timestamp: [15:40]
Eric delves into the intricacies of OneRiver's aggregated strategy, which combines long volume (dynamic convexity) with trend following. The Dynamic Convexity strategy leverages instruments like VIX futures and straddles on global equity indices to maintain capital efficiency. This integration ensures that the portfolio can adapt to both benign and stressed market conditions.
“In a benign market, 23% of the cash for margin and in a stressed environment that might go up to 50...allows you to start compounding from a higher baseline.”
— Eric Peters, [15:40]
6. Crypto Developments and Coinbase Acquisition
Timestamp: [24:55]
Discussing the cryptocurrency sector, Eric recounts OneRiver's journey into crypto, culminating in Coinbase's acquisition of OneRiver Digital Asset Management. This strategic move positioned OneRiver within a leading platform for tokenizing traditional assets, expanding their reach and capabilities in the burgeoning crypto market.
“Coinbase acquired that about a year and a half ago, which I saw that as once in a lifetime opportunity...now I get two jobs.”
— Eric Peters, [24:55]
7. Perspectives on Bitcoin as an Asset
Timestamp: [26:46]
Eric articulates his bullish stance on Bitcoin, highlighting its unique characteristics as a store of value with a predefined supply schedule. He contrasts Bitcoin's non-responsive supply with other assets, emphasizing its robustness against inflation and its secure network. Eric also touches on the potential of blockchain-based financial infrastructure reshaping global markets.
“Bitcoin has this unique store of value feature...the most secure network ever created by human beings.”
— Eric Peters, [26:46]
8. Building a Crypto Asset Manager
Timestamp: [31:48]
With the maturation of crypto investment vehicles like ETFs, Eric explains the strategic pivot to a multistrategy fund within Coinbase Asset Management. This fund incorporates trend following, a credit sleeve, and an opportunistic sleeve, aiming to optimize yield and protect downside while maintaining exposure to crypto's upside potential.
“When we started the crypto asset manager, we were focused on beta products...now they have ETFs, there's really no purpose to have simple Cayman beta vehicles.”
— Eric Peters, [31:48]
9. Evolution of OneRiver’s Strategy
Timestamp: [33:45]
Reflecting on OneRiver's growth, Eric discusses the S-curve model of asset management firms—from survival to identifying and scaling proven strategies. He underscores the firm's commitment to volume and trend strategies while hinting at ongoing research into inflation convexity as part of their expanding suite.
“We're really going to scale here. And we have some things that we're continuing to develop quietly an inflation convexity strategy.”
— Eric Peters, [33:45]
10. Current Market Concerns and Risks
Timestamp: [36:10]
Addressing contemporary investment challenges, Eric identifies capital efficiency as a top concern among allocators, especially in a rising rate environment. He warns of illiquidity risks exacerbated by highly leveraged multi-manager funds, drawing parallels to past market stresses like the 1987 crash. The importance of building portfolios resilient to unforeseen events is emphasized.
“The real risk that I think is rising is that with all of these multi manager shops...the risk of something that looks like 1987 is high and rising.”
— Eric Peters, [38:07]
11. Positive Outlook and Right Tail Scenarios
Timestamp: [39:57]
Concluding the discussion on an optimistic note, Eric explores potential positive tail outcomes driven by geopolitical shifts and technological advancements. He envisions a scenario where the US leads in infrastructure, energy management, and AI innovation, potentially outpacing global competitors and fostering economic growth.
“If the US Continues to invest and build out infrastructure...that's the most bullish scenario from a geopolit and an economic perspective.”
— Eric Peters, [39:57]
12. Conclusion
Ted Seides wraps up the episode by thanking Eric Peters for his invaluable insights into OneRiver’s strategic adaptations and the evolving investment landscape. Listeners are encouraged to visit capitalallocators.com for more information, past shows, and premium content.
Key Takeaways:
- Adaptability is Crucial: OneRiver successfully navigated the unprecedented challenges of 2020 by reassessing and realigning their investment strategies.
- Systematic Over Discretionary: The shift to systematic, quantitative strategies enhanced risk management and capital efficiency.
- Integration of Crypto: Strategic expansion into cryptocurrency through Coinbase acquisition positions OneRiver at the forefront of blockchain-based asset management.
- Bitcoin's Unique Position: Bitcoin is viewed as a superior store of value with inherent scarcity and security advantages over other assets.
- Risk Management: Emphasis on building resilient portfolios to withstand unpredictable market downturns and liquidity risks.
- Optimistic Future: Potential for significant economic growth driven by infrastructure investment and technological innovation, particularly in AI.
Notable Quotes:
-
On Surviving Market Crises:
“Nothing good happens to dead people. It just doesn't.”
— Eric Peters, [10:04] -
On Bitcoin's Store of Value:
“Bitcoin has this unique store of value feature to it that was underappreciated four years ago.”
— Eric Peters, [26:46] -
On Systematic Strategies:
“Build really well risk managed quantitative strategies so that if we were wrong... we have something to get us out.”
— Eric Peters, [13:09] -
On Portfolio Resilience:
“By the way, I don't know what equities are going to return on a forward looking basis...I just wanted to make sure that we had something that was robust to any range of market environments.”
— Eric Peters, [09:54]
For a deeper dive into the strategies and insights discussed, visit capitalallocators.com and join the community for access to premium content and future episodes.