Capital Allocators – Inside the Institutional Investment Industry: [REPLAY] Eric Peters – Trading and Evolution at One River (First Meeting, EP.18)

Host: Ted Seides
Guest: Eric Peters, Founder and Chief Investment Officer of One River Asset Management
Release Date: December 16, 2024

Introduction

In Episode 18 of "Capital Allocators – Inside the Institutional Investment Industry," host Ted Seides sits down with Eric Peters, the Founder and Chief Investment Officer of One River Asset Management. The conversation spans Eric's journey from his initial foray into trading, the challenges faced during his early career, the establishment and evolution of One River, and his insightful perspectives on the current and future state of the investment landscape. This detailed discussion provides invaluable insights into institutional investing, risk management, and the strategic thought processes that drive successful capital allocation.

Eric Peters' Early Career in Trading

Eric Peters begins by discussing his early exposure to the financial world, shaped significantly by his father’s career on Wall Street. Despite his initial exposure, Eric found traditional investment paths unappealing, perceiving them as "boring" and unfulfilling.

Eric Peters [05:22]: "I reached out to different friends [...] I knew I didn't want to do that."

His determination led him to Chicago, where he immersed himself in the hectic environment of pit trading. Eric candidly shares one of his most harrowing experiences:

Eric Peters [09:52]: "I was like, oh my God, this is a huge position... I was like, oh my God, what does that mean for wheat?"

This incident, where he nearly faced bankruptcy due to a sudden market move, underscored the volatile nature of trading and the critical importance of disciplined risk management. Initially trading corn, Eric expanded his repertoire to bonds and currencies, emphasizing hands-on learning.

Eric Peters [07:53]: "I just look back at it, it's just funny because I obviously didn't know what I was doing."

Transition to Investment Banking and Leadership Roles

After two intense years as a pit trader, Eric transitioned to a more structured environment at Lehman Brothers. Here, he was introduced to senior leadership that encouraged him to seek greater opportunities beyond the trading floor. His tenure at Lehman involved significant roles in money markets and later an entrepreneurial stint in London, where he honed his strategic thinking amidst market crises.

Eric Peters [12:22]: "I spent a year in New York and then I was offered an opportunity to go to London [...] that really launched me into my prop trading career."

Upon returning from a sabbatical spent climbing mountains, Eric co-founded a financial firm in 1998. Navigating through the dot-com crash, the firm gained substantial traction before ultimately selling in 2004, providing Eric with his first substantial experience in business leadership.

Founding One River Asset Management

The closure of his previous firm catalyzed Eric's vision to create a more resilient investment vehicle. Joining forces with Jeff Grant and leveraging the expertise of the former Grant Capital Partners team, One River Asset Management was established in 2008. The firm's inception was a response to the shortcomings observed in traditional hedge fund models, particularly their reliance on heavy leverage and complex strategies that were vulnerable during market dislocations.

Eric Peters [18:24]: "We decided to just look a little bit more traditional, albeit with multiple products."

One River distinguished itself by offering "funds of one," allowing institutional clients to tailor investment strategies specific to their needs, thereby enhancing portfolio diversification without the pitfalls of excessive leverage.

Investment Strategies and Themes at One River

Eric Peters elaborates on the diverse investment strategies employed by One River, each rooted in thematic and macroeconomic insights:

1. Long Volatility Funds:

   • These discretionary funds seek opportunities in global volatility, capitalizing on market dislocations.

   Eric Peters [25:08]: "It's a fund that we run [...] dynamic Convexity solution next to maybe the risk premium portfolio."

2. Dynamic Convexity:

   • A purely systematic equity volatility fund that employs quantitative models to manage risk and optimize returns.

   Eric Peters [25:08]: "Dynamic Convexity [...] takes profit and crystallizes those profits based on what we think is sound trading logic."

3. Trend-Following Strategies:

   • Both discretionary and systematic approaches are used to ride medium to long-term trends, incorporating robust stop-loss mechanisms to mitigate large reversals.

   Eric Peters [28:07]: "We trade in medium to longer term trend because we think we understand why we get paid there."

Notable early strategies included:

• Japanese Reflation: Capitalizing on monetary policy shifts in Japan.
• Dutch Disease: Analogous to the economic phenomenon experienced by the Netherlands, applied to global resource-demand dynamics due to Chinese urbanization.

Eric Peters [20:54]: "Dutch disease [...] we saw something very similar unfolding with the leveling out of the pace of Chinese urbanization."

These strategies reflect One River’s commitment to thematic, research-driven investing, aiming to identify and exploit significant macroeconomic shifts.

Competitive Advantage and Risk Management

A cornerstone of One River's success lies in its disciplined risk management and pragmatic investment philosophy. Eric emphasizes:

Eric Peters [28:07]: "We apply what I would say is just a lot of common sense [...] and trying to figure out what is it that you see in the market that gives you some type of advantage."

Key aspects of their competitive edge include:

• Humility and Curiosity: Recognizing the limits of their knowledge and maintaining a continuous learning mindset.

  Eric Peters [28:07]: "The best investors that I know are by far, they're humble."

• Risk Mitigation: Embedding stop-loss mechanisms and maintaining flexibility to exit positions during unfavorable market shifts.

  Eric Peters [28:07]: "We hate losing a lot of money and being vulnerable like that."

• Simplified Portfolio Structures: Preferring less leveraged, more straightforward investment vehicles to enhance resilience and adaptability.

Current Market Environment and Future Outlook

Eric Peters offers a nuanced analysis of the current market landscape, marked by rapid changes and significant intervention by the Federal Reserve and government bodies. He identifies several key themes:

1. Overvaluation and Equity Market Decline:

   • Acknowledges the substantial drop in equities as a correction from previously inflated valuations.

   Eric Peters [33:16]: "I think equities were just enormously overvalued to start with."

2. Second-Order Effects of Policy Interventions:

   • The Fed’s efforts to stabilize markets have introduced complex ramifications that may create new investment opportunities.

   Eric Peters [33:16]: "They now have a whole range of second order effects on society and on the economies and on markets that are extremely difficult for people to process."

3. Shift Towards Less Leveraged Portfolios:

   • Predicts a move away from highly leveraged and complex investment strategies towards simpler, more resilient portfolio constructions.

   Eric Peters [40:13]: "I think private equity is done. [...] portfolios will inevitably be with less leverage."

4. Impact on Pension Systems and Investment Returns:

   • Foresees significant challenges for pension funds and other institutional investors in achieving their return targets amidst lower expected market returns.

   Eric Peters [42:51]: "Anyone who has relied on investment returns to fund their future obligations has a real problem."

Eric warns against the continuation of high-leverage strategies, suggesting that the lack of capital destruction cycles, such as those seen in wartime or depressions, has led to an oversupply of capital chasing limited return opportunities.

Eric Peters [43:21]: "There's just too much capital in the world. [...] investment returns that are available ... those returns go down and we have a major, major issue around that."

Weekend Notes: Purpose and Impact

One of Eric Peters' significant contributions to the investment community is his "Weekend Notes," a weekly email newsletter that distills his macroeconomic insights, investment strategies, and market analyses.

Eric Peters [45:40]: "It's one of the most wonderful things in my life and career [...] Forces me to do an enormous amount of reading."

The Weekend Notes serve multiple purposes:

• Knowledge Sharing: Provides subscribers with concise, actionable insights derived from extensive research and industry conversations.

• Professional Networking: Facilitates discussions with policymakers, central bankers, and CIOs, enriching Eric’s understanding of global investment and policy landscapes.

Eric Peters [47:30]: "A large percentage of the CIOs at the biggest investment firms [...] read it every week."

This initiative underscores One River's commitment to thought leadership and fostering an informed investment community.

Personal Insights and Life Lessons

Beyond professional achievements, Eric Peters shares personal reflections that have shaped his approach to life and investing:

1. Hobbies and Personal Life:

   • A passionate outdoorsman, Eric finds solace and inspiration in nature, enjoying activities like hiking and running.

   Eric Peters [48:24]: "I really like getting out in the mountains. [...]"

2. Pet Peeves and Personal Values:

   • Dislikes pettiness and values humility and curiosity in both personal interactions and professional dealings.

   Eric Peters [48:47]: "There are a lot of people who are very arrogant [...] invests requires huge amounts of curiosity."

3. Self-Growth and Learning:

   • Attributes significant personal growth to writing and organizing his thoughts, which has enhanced his clarity and communication skills.

   Eric Peters [49:39]: "Writing has been the greatest gift. [...]"

4. Life Lessons:

   • Emphasizes the importance of humility, transparency, and building meaningful relationships, lessons he actively instills in his children.

   Eric Peters [50:28]: "I wish I had done that earlier. [...]"

These personal insights highlight the blend of professional acumen and personal integrity that drives Eric Peters' success.

Conclusion

Ted Seides' conversation with Eric Peters offers a comprehensive exploration of the intricacies of institutional investing, the importance of disciplined risk management, and the necessity of adaptability in a rapidly changing market environment. Eric’s journey from the chaotic pits of Chicago to leading One River Asset Management exemplifies resilience, strategic thinking, and a deep understanding of macroeconomic forces. His candid reflections on market dynamics, coupled with personal anecdotes, provide listeners with a rich tapestry of lessons and insights applicable to both investing and personal growth.

Notable Quotes:

• Eric Peters [05:22]: "I knew I didn't want to do that."

• Eric Peters [09:52]: "I just knew I didn't want to do that. And, you know, the shipping guy was talking about international crime, and I didn't want to do that."

• Eric Peters [28:07]: "The best investors that I know are by far, they're humble."

• Eric Peters [35:53]: "Anyone who has relied on investment returns to fund their future obligations has a real problem."

• Eric Peters [43:21]: "There’s just too much capital in the world... those returns go down and we have a major, major issue around that."

This episode is a must-listen for institutional investors, asset managers, and anyone interested in the strategic processes behind capital allocation. Eric Peters' blend of deep industry knowledge, strategic foresight, and personal humility offers a blueprint for navigating the complexities of modern financial markets.