The transcript from this week’s, MiB: Alex Guervich, Hon Te Advisors, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, BLOOMBERG RADIO HOST: This week on the podcast, I have a fascinating guest. His name is Alex Gurevich. He is a hedge fund manager and trader who has been involved in macro trading for decades, since the late ‘90s. And he’s one of these folks that basically has managed to put together a fascinating trading history and a great track record. In 2020, he was positioned in a very contrarian setup. At the end of 2019 and into 2020, he was anticipating a substantial decrease in interest rates when most of the rest of the world was positioned in the opposite way. And when the pandemic hit and emergency Fed cuts came in, his fund did spectacularly well. It was ranked second best performance of all hedge funds in 2020.
When you read his books, and his most recent one is “The Trades of March 2020: A Shield Against Uncertainty.” You can see there is a tremendous amount of complexity and deep thought in how his portfolio was positioned. They primarily trade derivatives, interest rates, swaps, currencies. It’s not your standard stock and bond trading. It’s a little more complex and sophisticated.
And this is one of the only books I’ve ever read, where the Slack channel, that is his trading desk where all the trades are — are given, confirmed, executed is — is pretty much reprinted as it was. I would say about a third of the book is Slack. And following this is really an education on how a real-world hedge fund trading desk operates. They’re located on the West Coast. So they’re both behind the East Coast by three hours, but they’re anticipating what takes place in Asia, and Japan, and China.
And what’s really fascinating about this is when the pandemic began, they were pretty much trading around the clock. It’s not a giant firm. It’s, you know, him and a number of his employees where, you know, for days at a time, trading continuously. And you could see it by the timestamps in the Slack channel, 1a.m., 3 a.m., 5 a.m., 7 a.m., 10 p.m., 8 p.m., and that’s West Coast time. Really fascinating conversation. He is a super interesting, not just a trader, but his worldview and how he looks at what drives asset prices is really fascinating. So if you are all interested in the world of macro trading, strap yourself in for an education because this conversation is fascinating.
With no further ado, my interview with Alex Gurevich of HonTe Advisors.
ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: I’m Barry Ritholtz. You’re listening to Masters in Business on Bloomberg Radio. My special guest this week, Alex Gurevich, founder and CIO of HonTe Advisors. Previously, he was the head of JPMorgan’s macro book. In 2020, HonTe was ranked second in net return by Barclays, and Gurevich was one of the Top 10 emerging managers as tracked by Eurekahedge. He is the author of two books on trading the first, “The Next Perfect Trade: A Magic Sword of Necessity.” His most recent book just came out this year, “The Trades of March 2020: A Shield Against Uncertainty.”
Alex Gurevich, welcome to Bloomberg.
GUREVICH: Thank you very much for having me. I’m excited about this conversation.
RITHOLTZ: As am I. Let’s start talking a little bit about your background. You earned a PhD in Mathematics from the University of Chicago. Tell us a little bit about that experience and how you get to apply math as a fund manager and a trader.
GUREVICH: Well, first of all, I will confess, the experience of being in graduate school at University of Chicago was so amazing, that for many years, almost decades afterwards, I suffered from nostalgia. Even when I was a successful Wall Street trader, I was often suffering from nostalgia from my graduate school days. So that’s a quick summary.
I think it’s pretty amazing for me, at least, to be in a very small circle of like-minded people who had — even though I grew up in a different country, and backgrounds are different, but interestingly, mathematicians all around the world do the same math. And they play the same math games, solve the same puzzles. So there was so much in common and so much fun to have in that environment. And —
RITHOLTZ: Were you — were you ever — were you ever planning on pursuing a career in pure mathematics, or was the thinking I’ll take this skill in education I — I earned at Chicago and apply to Wall Street? Tell us what your thinking was when you were in school?
GUREVICH: You know, honestly, since I was a teenager, there was kind of a double thinking in my mind. It’s almost like two superimposed ideas that I wasn’t really clear. My natural path was always to do theoretical math. I wanted to be a mathematician since — since I was four years old. But my fascination with finance industry with strategy was already there.
I remember seeing the movie “Wall Street” in back in Russia and I was totally fascinated by it. And just the whole idea of like financial strategy was so exciting to me. I think somewhere in the back of my mind, I always thought that at some point, I would end up on Wall Street. But at the same time, I was making all the motions to pursue the career in theoretical math. So I think I was a little conflicted about this until certain points.
RITHOLTZ: So you mentioned you saw the film “Wall Street” growing up in Russia, you grew up in St. Petersburg.
RITHOLTZ: Did you know you always wanted to come to the West? It’s hard to imagine seeing such a — just like, I guess, capitalist film like “Wall Street,” even with good guys, bad guys, and corruption in the film, even still seeing it in Russia had to be a little — you know, a little cognitive dissonance built into that?
GUREVICH: Well, I think it was very exciting and refreshing. They did show a bit of foreign movies in Russia, it was not that closed. I saw “Star Wars” in Russia, too. So we had — there was a little bit of cultural flow.
GUREVICH: So I did always want to go to America. There was no question in my mind, since I was six years old, I consider myself American. Like it was deep in my heart that I belong only in one country, in the United States. That was not a negative statement on Russia at all. It was not even about politics fully. Like, I mean, I — and also like I always loved Russian poetry and literature and architecture and many aspects of the culture. But I always felt that I belonged in the United States. There was never a doubt in my mind. I don’t know how I knew it, but I knew it since I was a little kid.
RITHOLTZ: So — so when did you move to the U.S.?
GUREVICH: I moved in the U.S. in the middle of college. It was ‘89. I was almost 20 years old.
RITHOLTZ: And you’ve been here —
GUREVICH: I did two years of college there, and I’ve had two years of college in America then I went to graduate school.
RITHOLTZ: And — and so first job out of school was where?
GUREVICH: Well, I went straight to graduate school and my first job out of graduate school, that’s when after I got my PhD. I went to Bankers Trust in ‘97. And that was a critical point of my decision when I decided, OK, I’ve already accomplished what I needed to accomplish. In math, I proved my mettle. And now, I really want to have a good opportunity. I’ve had a good offer. I’m going to try Wall Street.
RITHOLTZ: And how did you go — how did you end up at JPMorgan?
GUREVICH: Well, I was with Bankers Trust and I started trading fixed income derivatives. That’s very important to understand that I — most of my mathematician friends went to do some kind of quantitative work on Wall Street. I never did. I went straight into trading. That was my interest. I always said if I want to do associate, I would stay in the math department. Even if it pays less money, but the lifestyle will be worth it.
I wanted to trade. I went to Bankers Trust, which became the trades on a swap desk. And then it bought — they’re bought by Deutsche Bank. And at Deutsche Bank, because they’re still three organizing, I was pretty junior at that time, they offered me a different kind of job, which was very good in terms of the trade options. It was not particularly interesting for me, but it was very educational. But I started to look for a new job soon and I got a — in 2000, I got a job at Chase, basically doing basis swaps, which I did originally Bankers Trust as a junior trader, but I got a senior job at Chase. And then Chase merged JPMorgan, I ended up at JPMorgan Chase, running basis swap franchise, and then I launched the agency asset swap franchise also in the year 2001, I think.
RITHOLTZ: And then —
GUREVICH: And then —
RITHOLTZ: By — by 2003, you’re mentioned in The Wall Street Journal as the star trader of JPMorgan. Tell us about that. How did that feel being recognized for your trading skills?
GUREVICH: You know, honestly, it is interesting. At that time, I did not really appreciate so much the value of publicity. And I did almost no networking and almost no publicity. So I moved to proprietary desk in 2002 from — because after I did really well with my market-making businesses in 2001 and built them up really well, they’re forming global currencies and commodities group in the merged JPMorgan Chase Bank. By the way, this group ended up to be extremely successful going forward, and they offered me to shift and move to macro portfolio because my — even with my client portfolios, I was more and more focusing on macro factors.
And then that was like — then I had a very successful year in 2002, and started very successfully 2003 and that’s when they wrote an article. The article was really based on a leak. I think somebody just told them what positions we had and what money we’re making in 2003. And then there was this article. And it was, on one time, exciting and like — I know like my parents were excited about showing this article. But on the other hand, I was like a little disturbed that there is a leak and somebody knows something about my positions that they should not.
GUREVICH: And I was not really seeking publicity and I was a little shy of publicity, honestly, after that. I don’t think it was like a bad leak. It was a very positive article. There was nothing — I mean, no negative in it and there was nothing wrong about it. But I was just a little nervous about publicity after that, because nobody — I think they reached for comment, but I don’t think there was — this was like an article that JPMorgan was specifically pushing, right?
GUREVICH: So — but what I realized afterwards, like in a year’s later, when I started to raise money around my own hedge funds, I realized, well, actually, any publicity is kind of good and it’s good to know people.
RITHOLTZ: So — so let’s — let’s look at that timeline. So this was back in 2003. How much longer did you stay at JPMorgan for? And when did you launch your — your fund?
GUREVICH: Well, I stayed at JPMorgan till early 2007. And then — so it’s been quite a while, it’s now 15 years that I’ve been doing various things on my own. But I not always run businesses. I had one fund which actually did not work out. And I talked about this a lot in my first book, “The Next Perfect Trade,” about my first fund and kind of mistakes that were made there and things like that. It was called Cloudy Capital. And then I, for a few years, basically was running my own money, and then HonTe was created around 2015 and started to take outside money around 2016, relatively recent, but also relatively established.
RITHOLTZ: Since you mentioned HonTe, let’s talk a little bit about that fund. Tell us about the genesis of the name HonTe, which you described in the book, “The Trades of March.”
GUREVICH: So HonTe is a Japanese strategic term. It originates from the game of Go. And Hon means to and Te means move, so it’s to move. But the context in which it’s used, sometimes in a game, you make a move which is not the most flashy or aggressive, but what they call an honest move, like what you really have to do even maybe not the most impressive thing to do, but that’s what gives you the best results in the long run.
RITHOLTZ: Really interesting.
GUREVICH: And that’s what I wanted to make this strategic concept a symbol for how you run the fund.
RITHOLTZ: I like it a lot.
RITHOLTZ: Let’s talk a little bit about what you do at HonTe. You went from being a trader to the head of JPMorgan’s macro book, to launching this — this hedge funds. Tell us a little bit about those transitions. What — how were you able to build on your prior experience with each new position?
GUREVICH: Yes. I think it was very important step stone in my career that I started as a market-maker. Some people who move directly into hedge fund by side business, I think missed out a little bit. Seeing what’s actually happening in the trenches, what’s happening on a trading floor of the bank, how the client flows work, what’s doable and not doable, I think it was very important for my formation as a trader.
I remember the crisis of ’98 and when there was a first freeze of the market that I observed, I was very junior, but as it turned out, I had to make some decisions because my boss was on vacation and I had to take over some aspects of the book that I was focusing on, and deal with big hedge funds. I was like super junior trader and all these big hedge funds coming to me, begging me for unwinds because they were blowing up. And people would ask me questions like market salespeople would come and ask me questions, “Where is such and such trading?” And I was like, “What are you talking about? It’s not trading, the market is frozen.” There is maybe one beat, and if I show any offer, my boss will fire me. That’s my market.
RITHOLTZ: That’s really interesting because there’s a line in the book, “The Trades of March 2020,” that really jumped out at me. Tell me about this quote “Every crisis starts with fear and ends with necessity,” explain that.
GUREVICH: You see a crisis – first of all, crisis always has to be something unexpected. Crisis never happens on schedule. We know that, right? Like, when people try to schedule a crisis like Y2K, you get no crisis.
GUREVICH: So it always comes from unexpected direction, by definition. And then usually when there is a crisis which spills into financial markets, people lose liquidity. And then the panic starts, we need to liquidate positions, how bad things can go. And things get to the point when people are like really thinking that the world is ending, as we know it. And one day, it might end, as we know it. By in global financial crisis, people thought, “OK, the whole financial system will collapse.
In COVID, I don’t know what people were thinking. We’re all going to die or whatever. Everything is going to be shut down. I don’t know what people were thinking. But clearly, people were quite panicked about what things can happen. And now, of course, we’ll have other existential threats with the current war situation, as we’re recording this.
So first, it starts with fear. But then what happens is that because – and some people add some fear, but then people have — eventually, people have to act not because of their fear, and not only because of their choices, but because of the decisions are forced. What happens is if you are a founder and you’re losing money, and your AUM decreases, you need to reduce your position. This is not about fear; this is about necessity. So you have to liquidate. So various people need to liquidate certain positions, do certain transactions, because exchanges are forcing them, the margins are forcing them, the bosses are forcing them.
And then the policymakers step in and they buy assets or provide liquidity, and this is all – this liquidity comes in not because somebody chooses it, but because these are various unstoppable flows that’s happening in the markets. And this is a necessity. In the end, there is no choice for things, but to go certain ways. Does it make sense?
RITHOLTZ: Yeah. No, it makes perfect sense. We’ll talk about the book later. But there are some really interesting excerpts where you are showing your — your trading in real time and the conversation you’re having with your colleagues in your desk. When — when you say it begins with fear and ends with necessity, can you feel that as a trader when you’re plugged into the market? Are you seeing that in flows, in prices and in opportunities?
GUREVICH: Yes, and I even feel it in my own emotion.
RITHOLTZ: Explain that.
GUREVICH: And one of the things I tried to concentrate on the book is like show the psychology of trading. There were moments and I point them out on the book when I felt like deep existential threat, like, what’s going to happen? I feel like that those moments were like, “Yeah, the Fed just cut 100 basis points, but I’m not sure that they’ll do it, right? And you’re feeling like, “Will everybody cut my funding tomorrow, right?” Will – will there be no balance sheet? What’s going to happen? That is — when you think in those terms, you realize that the market is still ruled by fear. When you start thinking, “OK, I’ve reduced my positions. Now, the Fed is buying those assets that I’m holding, and they’re rallying,” you start feeling the sense of necessity.
RITHOLTZ: Very interesting. So — so let’s talk a little bit about the trading in 2020 during the start of the COVID-19 pandemic. In that year, your fund ranked second in net returns. You’re one of the Top 10 emerging managers. Tell us what your thought process was in 2020, what led to so much conviction that you had positioned right. And I believe if I’m reading the book correctly, you were fairly well positioned for a series of rate cuts in 2019, when much of the market was still expecting rate hikes, did — did I get that right?
GUREVICH: Yes. Yes, and that definitely contributed to success in 2020. Generally, one has to realize if you’re on a macro portfolio and there is some kind of exogenous event, you’re not always fully positioned right for it.
GUREVICH: Maybe like if you always own just optionality, there are pure option funds. But even that like event could do some very different things. Like, events don’t go just one direction. For example, U.S. election in 2016 sent markets in certain way that people did not expect at that moment, right? But then there was September 11, the global financial crisis. There was European debt crisis. There was — of course, going back, there was like 1987 crash. With all of those events, you can look at which happened suddenly. They’ll have different flavor, and you will not always be positioned right for it.
So there is a little bit of an element of luck in terms of being positioned right. But there’s also a little bit of an element of work. If you’re always a little positive towards crisis premium, like if you tend to be — have assets that have some balance in your portfolio, that there are some assets that make positions, that make money if things go sideways. In that particular case, I was — in the job cut protection, I had a very strong view in 2018, that rates are heading an exorbitant zero. I think this view was ex ante undisputable. I think people who thought otherwise were just plain wrong. Because everything — same way as 2014, I was convinced that rates were going lower. And I delineated my logic in 2014 in my first book, “The Next Perfect Trade,” even back then.
And then over the next few years, between 2014 and 2020, up to COVID, we’ll have the situations when everything that could go wrong for bonds went wrong. Like, we had very robust growth, strong employment. We had U.S. politics, fiscal, both fiscal — fiscal politics and growth. Everything was actually negative for bonds, if you looked at it, if you looked at those numbers, right? And those fiscal expansions and the elections and everything, you will — you would think everything would be negative for you as bonds. And yet they performed tremendously well, which — and I had that logic in place, why there was no choice for them not to perform as well. That’s why I called my first book “The Magic” — “A Magic Sword of Necessity.”
RITHOLTZ: So — so —
GUREVICH: I like to say sometimes the magic sword of necessity is on shift.
RITHOLTZ: So — so how do you conceptualize all of these macro currents and cross-currents and events? Do you create a model, or is it really you’re just putting together a lot of different ideas and trying to game out how they’re going to manifest themselves in prices of interest rates and inflation, and other factors that — that drive markets?
GUREVICH: I think what I — it’s a kind of a hybrid. I follow — I follow the market just kind of continuously. It’s hard to say because if you’re in the financial markets for 25 years, without ever really taking a true break, there is certain continuity to it. You’ll see how things develop in the world. Of course, you can miss out on important developments, but you have a general sense of what’s happening to interest rates, what’s happening to currencies, what is the mood of the world, and you try – you form certain opinions.
Now, I have a strategic system which again delineated in my first book, but I refer to how I applied it a lot on the second book in which I rank trades. What I try to do, I try to select trades which, ex ante, look good. And the bond trade of 2014 was the best example of this. This was the highest rank trade I ever had in my ranking. I have a numerical ranking system and this was the highest rank trade in basically all history of financial markets that I know of. And it has been proven to work this way because this is the highest rank trade, the trades that make money even if everything goes against them.
So that is the strongest test. It’s very easy to like make money on a trade if — if you — if the events help you. But how does the trade perform if events don’t help you? Probably, the most salient test. So I rank trades based on certain factors that I believe predetermine which trades are more likely to make money. And none of those are certainties, it’s all about probabilities skills. It’s all about kind of trying to shift the odds from being the player in the casino to being the casino.
RITHOLTZ: When you were running macro strategy at JPMorgan’s trading desk, were there any similar perfect trades lining up? What did you see from your macro perspective as low risk, high return trades?
GUREVICH: Well, I think definitely my first perfect trade and probably – like, there are two great tranches for perfect trades. And I recall the first one happened in 2002. And in simple words, that trade in 2002 was risk parity. And back then, I had no idea that some people were already doing risk parity. I think the word, it was totally independent thinking. But I didn’t know, of course, the word risk parity. I don’t — I didn’t know what Cliff Asness was doing what Ray Dalio were doing at that time. I still don’t know exactly what they were doing back then. I’m not like a historian of hedge fund world
But internally, at JPMorgan, in 2002, I gave a presentation about — and looking back at this, it was exactly risk parity. I talked about volatility, portfolio weighted by implied volatility, portfolio of S&P futures and the eurodollar futures.
RITHOLTZ: Really interesting. One — one of the things that we always kind of laugh about is the people who tend to be one particular type of trader, but for whatever reason, they can’t help but getting sucked into the macro trade. And I’ve heard various trading desks call them macro tourists. I don’t know if you’re familiar with the phrase.
GUREVICH: Yes. Yes, yes, that’s common.
RITHOLTZ: Tell us your thoughts. First of all, why are people so compelled to believe they have the ability to anticipate and trade around macro events? It’s — it’s one of the most challenging types of trading if you’re not in it every day.
GUREVICH: Well, I think there are two things going on. First of all, successful people have a tendency to become ultracrepidarian, which means like they just think that they’re skilled at more things than they actually are.
GUREVICH: Like, if you are — and I’ve fallen prey to this many times in my life too. When I think like I’m really good at many things, you try some new things, and you think, “Well, surely, I will be good at that too. Surely, I can apply this logic.” For example, if I use my logic and apply my logic to analyze stocks, right, individual stocks, surely, I can do that, right? My intuition, it’s very easy for me to — for example, to say like, “This is my intuition about geopolitical developments.”
For example, think about this, I’m a macro trader, right? Obviously, my portfolio will be impacted a lot by current military, whatever, and geopolitical developments. So unavoidably, I start forming views about what can happen, what’s the next step in the conflict. Now, do I really have any qualification to know what the next step in the conflict is? Absolutely not.
Furthermore, I don’t even have qualifications to know what the next inflation release will be. I mean, I don’t have any — I don’t know any more than thousands of other economists that analyze it. What I have qualifications for is construct trade and portfolios, but it’s very easy to go into other areas which are related. Now, imagine that you are, say, an individual stock trader and you know that your stock is affected by interest rates, or currency, or even just overall direction of economy. It’s very hard not to start forming views on those things. And what I think is very hard in your mind to compartmentalize between the areas you’re an expert in and the areas you’re not an expert in.
RITHOLTZ: Really interesting. Let’s talk about your first book first, “The Next Perfect Trade: A Magic Sword of Necessity.” What — what’s kind of interesting about this book is you use all of these medieval weapons, armored shields, other types of weaponry, as a metaphor for trading. Tell us how you developed that sort of mindset.
GUREVICH: I think, first of all, honestly, people — when people use metaphors, they just reach to whatever is fun for them. For example, if you’re fond — like I hear people a lot use, for example, baseball metaphors. I know nothing about baseball so — and I don’t — I don’t really watch team sport.
But I do like medieval warfare and I read a lot of fantasy books which involve it. So that’s on my mind. So I think the idea is you want to use metaphors which are fun for you, but also kind of powerful. I think going into battle is a powerful metaphor. People can relate to it. You go to battle, you need to train, you need to have a weapon to attack, and a shield and armor to protect yourself.
RITHOLTZ: So —
GUREVICH: And that is a very simple — I kind of — I think anyone can relate to it. But honestly, for me, it’s just fun to write this way.
RITHOLTZ: So it’s — it’s metaphors for both risk, which is the shield protects you and reward, which is how the sword obtains gains. Is that a fair description?
GUREVICH: Yeah, that’s a very good way to put it. Yes.
RITHOLTZ: So I noticed in the new book, which we’re going to talk about, there’s a lot of astrophysics in there, accretion disks, tidal gravity, wormholes, event horizons, a lot of black hole related. Why the nomenclature of astrophysics?
GUREVICH: Well, that’s another area which is super fun for me. I really love black holes and I love reading about them. But also, I started thinking about this a lot because of the time distortion factor. One of the reasons like why I started — why I thought about writing this book, “The Trade of March 2020,” because the month of March was — seemed like infinite. Every trading day was like a few months’ volume of trading every day. And that’s when I said like at the end of that month is like, “Well, we survived March — the month of March. Somebody should read — write a book about this month.” And then it’s like, OK, I can write a book about this month because there’s so much happening.
And things normally take sometimes. The trades that sometimes will take years to unfold would unfold within hours, like certain trends would unfold so rapidly. So I’m a long-term trader, I try to be patient. A lot of times, I put the trade on and it’s there for two years. And in March 2020, a lot of trades had to be changed around quite a bit within days. And that — so it felt like a time warp. And when you have this time warp, distorted time, that automatically makes me think of black holes.
GUREVICH: And then I realized like just time was warped, but the whole market structure was warped. Things are just getting really disconnected. Like, one thing was trading — the way one thing was trading had nothing to do with the way the other thing was trading. And that also makes me think of like time space ruptured by black hole.
RITHOLTZ: Really, really interesting. I — I think this is the first book I’ve ever seen that has, I don’t know, maybe a third of it is actual internal slack messages on — on the trading desk. That — that’s pretty unique. Tell us why you decided to embrace that approach.
GUREVICH: Well, I realized that there is a lot of good books written about trading. And some of them are written by journalists interviewing traders. Some of them are written by money — money managers themselves. But any book even — and that includes them on my first book. Any book that one reads, shows a person’s perspective, a person’s recollection, their biases, their views, and that’s okay. You read that. If you read somebody’s book, you want to read their views, right?
I wanted to get the closest to get — writing an objective book, even though my commentary is obviously subjective. But the book that you really could not say, “Well, he fudged that.” You could really see the timestamp on everything I say. And I think that value of that is when I think about in terms of — say, for example, recently, I’ve been using this analogy a lot. If you think of aspiring traders on medical students, they could read an anatomy book, which could be my first book or some other trading book, or they can actually go into the operating room.
Seeing the actual trade shatter will — for anyone who actually wants to be in financial markets and wondering what it’s like, they can actually go and see what is happening in a hedge fund when there is a crisis. It’s similar. Imagine, do you want to — would you be interested in being like in Oval Office of the White House when there is some kind of military crisis developing like Caribbean crisis, a current crisis, right? Similarly, I don’t — maybe like you don’t want to be like at the CDC headquarters when pandemic was unfolding, right? It’s interesting to take a peek at those places.
And I felt my slack chances – let my slack record allow people to see it in a very spaceful way which I cannot paint. I cannot paint myself like, here, I was making all the right decisions. You could see all the confusion, all their commotion, all the mistakes, all the like, “We did this trade today, but you know what, we’ll have to unwind that because it’s not working at all the way we want it, right?” All of those things happening in real life, what it’s like in the tranches.
RITHOLTZ: One of the things that really stood out is — at least to my eye, was the attempt to make sure that there weren’t simple trading errors. You would put in an order; it would get called back to you in a very specific way. Someone else was tracking the price, the time, the margin lines you had to make sure you never went over buying power. Like, there are a lot of moving pieces throughout.
Do you think the Slack channel captured all of those, because I don’t know if people who aren’t familiar with trading desks pick up a lot of the — the complexities there? You specifically refer to it in the text, but it goes by really quick. And — and a lot of the trading desk slack chatter, when you look at the timestamps, there’s a ton of stuff happening in a very, very short period of time.
GUREVICH: Yeah. It is actually — Slack, these things — Slack is only a fraction of what is happening because it does not show any of the operational talk, right? And it doesn’t take any of the strategy research talk and it doesn’t actually have operation talk. That is all history that’s getting checked and booked, and there is tons of work done by the – by our middle office people, right, by operations people.
GUREVICH: So there is a lot of stuff going on in the background in terms of operations. But I did think it was important to — particularly important to show Slack chat in all its entirety without cutting this boring — almost like boring confirmations and operational discussions just to see what the process is like. I always like get laughing like when they do in TV shows, when somebody says — picks up the phone and says, “Wire $5 million to such and such, and click off.”
Do you know what happens in the real world? They’ll call you back, they will confirm that — they will ask you what the wire is for. They will make sure to ask for your birthday even if they talked to you a hundred times before. Like, there is a lot of due diligence goes into any kind of financial transactions, which I think a lot of media portrayals of the world skips. And again, this is — yes, if you’re in an operating room and you are performing a surgery, they cut — they cut the person. They put those little like — I don’t know what it’s called, pieces of gauze on side and they count all of them.
GUREVICH: So they don’t miss one, right?
GUREVICH: There is a lot of that going on. You cannot have breakdowns, right? And you could see the moments when we’re finding an error, or confused about something, and fixing it on the commotion. And that’s — again, they’re just part of showing what it is really like to do the work.
RITHOLTZ: One of the things you say in the book that I thought was intriguing is “People may be surprised how little time we spent discussing the stock market.” Tell us a little bit about your thinking there.
GUREVICH: Well, one of the things is I’ve always thought that stock market is what it is. It’s a fraction of financial markets. It’s very important one because stock market is a really good indicator of what’s going on in the world and it’s tends to be pretty good leading indicator of certain things. But trying to figure out, on a given day, whether stocks are going to go up and down, yes, I spend very little time on such discussions. It’s extremely rare for me to talk about whether stock market is going to go up or down today or tomorrow. I have no idea and I kind of not even think in those terms.
I find that stock market is important component of the portfolio. And I mentioned early on that I had been involved in risk parity type of trading early in my career, and I still — and I look. But for me stock market is not special. It’s not like the main investable asset. It’s just one of the assets. And sometimes my portfolio will not have any stock — any positions related to stock market at all. And sometimes it will be heavily positioned on some space. It could be not exactly stock market; it could be something like dividend futures. It could be any kind of stock indices around the world. For me, that is just a component and I don’t spend a lot of time speculating on a short-term direction of it.
RITHOLTZ: Let — let’s talk a little bit about options. I love this quote, “So after acknowledging my shortcomings and swearing up and down to never touch options again in my life, what was I to do, but answer the simple question and buy more options.” Tell us a little bit about your experience with options and why you sometimes felt you had no choice, but to participate in the options market?
GUREVICH: Yes. I mentioned — I’ve talked earlier that I used to be an options market-maker and I think that gave me like a lot of insight. I know there’s actually a pattern. Hedge fund managers who are options market-makers in the past tend to use options much less when they become — go to the buy side. The reason is that you kind of know the fallacies — all the fallacies associated with using options. Every option looks — if you buy an option, it always looks great if the underlying market assumption is correct.
If you think the market goes up 30% and you buy a call, of course, the call will look great. But that kind of idea of valuing a call based on your original speculation that market is going to go up 30% is fallacious. And when you own options, there’s a lot of ways for them to go wrong. You could be right about the direction, but it just can move not fast enough or not far enough on the timing you need and you will end up having to correct the view in a losing trade. And don’t even get started on complex options. I absolutely hate all those knock-in, knock-out barriers. I think that is just — 90% of the time is just setting the cash on fire to do complex options. There could be some exceptions, but —
RITHOLTZ: So — so why did you feel compelled at times to say, “I swore off options, but I had no choice. The trade presented itself and I had to participate with options?”
GUREVICH: Yeah. I discussed in my book why — what — on occasion, options — on occasion, options are so severely mispriced, there is no choice to use them. And usually, it has not — not to do with actually directly like what is the implied volatility or what the money option is. But sometimes options structure is totally wrong. Because the typical option pricing is always built on some kind of normal distribution, that there is a central scenario which is most likely and other scenarios that get like less likely as you move away from the central scenario.
And yes, people have always like fat tails, skew or kurtosis, I don’t even know all of those terms. I used to know them better 20 years ago, or so. But there are all those things that just to — not use the classic normal distribution. But it’s still — the idea is that there is certain central most likely price. Occasionally, that is not the case at all and that’s what I was recognizing in 2018. There was no most — like, if you looked at where the interest rates should be in 2020, there was no most likely price. The safety of price to close to 3%, the 3% was not a tiny teeny bit more likely than 1%, or 4%, or 2%, or zero.
So the forward that had an interest rate had absolutely no — no prerogative in terms of the actual outcome, except that it was the forward that was the market price. But in terms of where the price will end up, gave us absolutely no signal about that. And because we could be easing more, we could be tight, we could be easing which I thought would happen and we could be tightening. And that originated my option trades for contracts of 2020.
And what happened in 2019, that the vol just on those options rates came down so much that the trade was just undeniable. And I had to say, OK, I gave up some of my previous gains on options because the vol collapsed so much, but that — that is not what I should be thinking about. What I should be thinking about is not what I made and what I lost, but here’s where we stand now. This is the market price and this is the portfolio. I’ve done this before, sometimes with success. Sometimes I was wrong, of course. I can have some positions going against me. But I say now the levels are really good and I’m going to dramatically increase the position.
RITHOLTZ: Really, really, really intriguing. My extra special guest this week is Alex Gurevich. He is the founder and chief investment officer of HonTe Advisors, a macro hedge fund, which was one of the top-ranked performance funds in 2020. So we’re recording this when we’re about to get the March Federal Reserve decision on interest rates. And one of the things that — one of the things — I’m going to say that again. One of the things that struck me from the book was your line, “The Fed might occasionally surprise — the Fed might occasionally surprise the market with rate cuts, but they almost never surprise the market with unexpected increases.” Explain that situation to us.
GUREVICH: Yes. So we’re very close to the Fed and my adrenaline is starting — starting to pump. And the logic is that there are occasions when Fed did inter-meeting cuts to support markets and dissolve crisis, dissolve various liquidity problems that were happening. And usually, no matter how much expected, they tended to surprise by doing even more aggressive rate cut measures when crisis is like in 2001, or 2008, or 2020 would occur.
I think they’ve had very little upside of hiking when market doesn’t expect them to hike. Because tightening interest rates has a very slow effect. Whether they’re going to raise rates 25 basis points today, or extra 25 basis points, I mean, today, or at the next meeting, they have plenty of — that’s not going to have any major effect on financial markets. Sorry. It’s going to have effect. I apologize. They’re going to have effects on financial markets, but they’re not going to have long-term economic effects, that actual tightening.
So it seems like a very bad risk-reward proposition for them. Once they hike more than expected and cause a stock market crash or some kind of disruption, it will all be on them. While they have plenty of time to do what the market expects them to do, and then signal if they need — if they — for the next meeting — what they actually want to do at the next meeting. Because of this mentality, there have not been any inter-meeting hikes or surprisingly hikes in size since, I believe, 1994.
RITHOLTZ: And — and tell us what happened in ’94 because I recall there was a little bit of a disruption in the bond market then, wasn’t it?
GUREVICH: Yeah. That caused the bond market collapse and I think they kind of just learned a lesson why — it’s very hard for me to imagine why would they bother? So the event has to happen in four minutes and I could be proven wrong. But the market is pricing maybe like 10% of chance of them doing 50 basis points.
RITHOLTZ: So how do you position yourself in anticipation of an outcome where there are only a couple of possible results? Are you positioning for all the results? Are you doing the ones that are the most mispriced that gives you the best risk-reward profile?
GUREVICH: I’m trying to position for mispriced results, and usually that means that I could take some losses if I’m wrong. I do like to have trades that go in every possible direction, but like something that will make money if this — if the other thing happens, right? But it’s not always possible to have portfolio balance.
The dichotomy that one faces on such situations, when you’re pretty sure which way the way it will go, is that, well, on one hand, you have really good odds in your favor. On the other hand, the risk symmetry is very bad. So if you make a bet, for example, with just very specific bet on the FOMC outcome, that they’re going to go 25 basis points, I might make such a bet, but it will be very moderate in size because — so that if they do go 50, which would be an outlier, I cannot afford to blow up. I can — it has to be a moderate manageable loss, if that happens.
RITHOLTZ: And you also spend a lot of time betting on intermarket relationships, various currencies and various interest rates around the world. Tell us how you approach those sorts of trades in the face of Federal Reserve action?
GUREVICH: Well, there is a strong, obviously, relation between interest rates — interest rate differential between currencies and — and — and actually currency performance. Interest rate differentials, the carry-on currencies tend to be actually probably the best long-term predictor of currency performance if you look at the total return. Even — not even the real carry, but just simply the nominal carry seems to be a very good predictor of long-term performance.
So of course, central bank decisions have a very meaningful impact on currencies. And sometimes this is where you can look for opportunities like I did in 2014, when one central bank is priced in to do all those rate hikes, but the currency is actually weaker than it should be. Like the dollar was much weaker than it should be in 2014. So long dollar, long bonds was a very good trade because if the Fed cut or raised rates as it was projected to post 2014, as fast as they projected to, surely, the dollar would be as stronger or even stronger than it was — than it was trading.
But there was also plenty of opportunities for dollar to strengthen even without that, even if the Fed did not really raise rates as much. So those type of relationships allow you to understanding this type of dominance that being long dollar is dominant over being short bond, and being long bonds is dominant over being short dollar. It’s a little difficult to grasp. You’d probably have to read the book and work through the logic to understand how this logic works. But this type of relationship allows me to get a lot of edge when I get them right.
RITHOLTZ: Really interesting. You have very significant fixed income derivative experience from your prior roles. How large of a piece of your fund strategy does that play?
GUREVICH: It does play specifically on the fact that we’re much more granular when it comes to U.S. fixed income than other products. When we deal with products that we don’t know about, we try to deal with simple liquid things. Like liquid – say, we go to a country, we try to see what are the liquid bond futures on that country. OK, so the interest rate decision is 25 basis points —
RITHOLTZ: Here it comes. Yeah.
GUREVICH: — as we expected. I think the next big thing, we’ll really be waiting for their — waiting for the press conference. There won’t be that much happening, I think, until press conference. I mean, market can do all sorts of weird things. But otherwise, not that much will be happening till the press conference.
RITHOLTZ: So let’s — let’s talk a little bit about inflation and what the Federal Reserve is doing because this is the perfect time to bring this up. You know, on the one hand, it looks like the Fed is long overdue to get off of their emergency footing and — and bring Fed fund rates up to — at least closer to a normal level. And on the other hand, everybody is jumping up and down about inflation. But it seems like much of the inflation that’s out there isn’t very much going to be affected by what the Fed is doing.
Automobiles and semiconductors seem to be outside of the Fed. Energy prices and the war, the Russian invasion of Ukraine, Fed rates aren’t going to impact. Home prices really is an inventory problem and a massive surge in — in pent-up demand from both the — both the pandemic and a decade of weak household formation. When you see the sort of things that are taking place, you know, what’s your thought process as to what’s really going on at the Fed?
GUREVICH: Yes. So one of the things that I can always repeat, and honestly, it’s one of those things, “Do as I say, but not always do as I do.” I repeat this advice. Don’t focus on what the Fed should do. Focus on what the Fed will do. We’ll have our opinions about policy, and they have some strong opinions about policy. But what is really important to understand, like, what actually will happen. For example, I could say, today, I could be talking they should not hike at all, or someone else should say they should really hike 50 basis points. But the reality is they were going to hike 25 basis points in March and that’s what they did. There was really very little doubt that that’s what’s going to happen.
And the interesting part about this discussion, that you had this discussion unfold live, you heard me, my reasoning before it happened not after it happened. It is my — yes, I totally agree with you. I think it’s kind of a little insane that Fed feels urgency to raise interest rates to do anything about the current situation. Because, exactly, if you said the situation was absolutely not in their purview, you cannot fix supply bottlenecks with raising interest rates. You surely cannot fix them quickly.
You could crash demand. But the underlying problem is already like — first of all, if you ask why is inflation even bad? Well, people are not happy that they cannot buy things, right? They don’t want to —
GUREVICH: Right. So you make it even harder for them to buy things, inflict even more pain on people, just so that you’ll end up inflicting even more pain on people, just so the demand would go down and maybe then the price will come down. It’s really ridiculous logic and it’s very slow logic. It’s not going to work very much.
A lot of what we’re seeing right now, a lot of inflation that we’re seeing right now, a lot of generally economic outcomes, part of a more — even part of a more general economic outcomes are typically the result of what was happening a year or two ago, not what’s happening today, right? So the inflation that we see, the economic numbers they see are the result of – are the result of stock market rallying over the last two years, of incredible monetary expansion, of incredible fiscal expansion of 2020 and 2021. Of course, we’re seeing high inflation, all those numbers.
Now, right now, we have a very different environment. We’re seeing relative fiscal contraction. We’re seeing raising rates. We’re seeing monetary contracts coming up. We’re seeing stock markets no longer cooperating with people. I think that one or two years from now, we’ll see very different picture which will unwind what we see now. What the Fed is doing now is not relevant to the – it shouldn’t be relevant to the numbers we’re seeing today. It was the result of what they were doing two years ago. But I think — I think this is the case. I don’t like criticizing too much. But I think this is the case on political pressure, and kind of the sense of zeitgeist and the chatter blindsided them a little bit.
RITHOLTZ: So let’s talk about — let’s talk about that, because that’s really interesting. And as you said earlier, if the Fed really thought that they’re raising rates now here in March of 2022, would do something about inflation, they could have done an increase at the previous meeting, they didn’t. They could have done an inter-meeting increase, they didn’t. They could have done 50 basis points, they didn’t. This seems to be — you know, when I was on a trading desk, they used to call it throwing a virgin in the volcano.
Sometimes you just have to appease the market, give them a little bit, so they don’t think you’re too far behind the crowd. And that’s what this — I don’t want to put words in your mouth. Is this quarter points essentially addressing that — that the fact that they were surprised by the political pressure and the noise about inflation? Is that what you’re suggesting?
GUREVICH: Something like that. Yes, I think it was the political pressure that got to them. It does not make, honestly, a ton of sense to me, this whole thing, because — but, yeah, I think it was a political pressure that — and kind of the mentality, a lot of people started to get really concerned about inflation. Honestly, I was concerned about inflation, but I was concerned about it in 2020. I’m not concerned about it now. It already happened. And I’m not concerned about inflation going forward because all the conditions point towards negative inflation going forward, not towards positive inflation going forward. So I would become — now, I’m concerned about deflation in the next two years.
RITHOLTZ: It’s — it’s funny you say that because I pulled out this quote from the book, which came out a while ago, which obviously, you wrote long before that, “In fact, when I realized that if anything, the stimulus and liquidity triggered by the crisis would have long-term inflationary consequences.” So clearly, this most recent bout of inflation you anticipated, it sounds like you’re in the transitory camp. Is that — is that a fair statement?
GUREVICH: I’m definitely in a transitory camp with a passion. And I — just to be a bit humble about that, I anticipated the inflation, but I did not really get the path right fully. And what was — I did not anticipate this reaction. So I did not anticipate. Like, what I was thinking that even if the events — like, if you told me that the events would unfold like the way it would unfold — they unfolded, I would expect rates to be solidly zero now and holding.
I had no idea that the Fed would panic into the trade rising. And the main reason why I didn’t think that will happen and I still think that the — but I’m also aware of dissenting opinions with me. I think that they were so much more focused on this environment than reducing their balance sheet. Because when else they’re going to have a chance to reduce their balance sheet? Because right now, they raise rates, crash the economy, have the rollover, then they won’t have another chance to sell any of their balance sheet and they’re stuck with this thing, with this excess reserves that they have paid interest on, which they’re currently raising.
GUREVICH: The point of this exercise makes very little sense to me. Why raise interest rate on reserves, on trillions of dollars of those reserves, the interest rate you’re actually paying to banks? The banks don’t really need a bailout right now.
GUREVICH: So why then the fact that bailing out banks by raising interest rates, while they could be tightening monetary conditions, if so needed, by doing the much needed reduction of the balance sheet?
RITHOLTZ: So — so they’ve already begun to roll back quantitative easing. At — at what point do we start to see quantitative tightening? And again, this may not be your specialty, but clearly, what the Fed is doing in the bond market impacts how you build a portfolio and put on specific trades.
GUREVICH: Well, we’ll probably know more about quantitative tightening schedule — quantitative tightening schedule when we look at their postgame press conference, and then look at their press — press conference, and probably there’d a lot of questions about this. I believe that they are going to — so far, they are on track to start, at least, running off the balance sheet. But there might be a lot of — and I don’t think like details of how they’re going to do it or what place are very important, but I think they will start running off the balance sheet. I just don’t know how long the time they will have to do it.
What’s going to happen is, they’re going to — they started to raise rates. They’re going to start running off the balance sheet. The moment they see the inflation in the economy showing some cracks, they might stop raising interest rates. But stopping the run-off of the balance sheet will be probably a little bit more of a ponderous process.
RITHOLTZ: Really interesting. Let’s talk a little —
GUREVICH: But I don’t know — I don’t — so we might have like tightening still going on in the background, even when they stop tightening. That’s why I’m actually so much in the camp that they’re going to be easing next year.
RITHOLTZ: That’s really interesting. Let’s talk a little bit about — because you trade currencies, I want to talk about cryptocurrencies and central bank digital cash. Tell us your thoughts about what you think is happening in that space, and what you think the Fed and other central banks are going to do about digital currency?
GUREVICH: Well, first of all, I did — like, when I think of digital currencies — I wrote an article about this actually a few years ago, when I called them quest of digital gold. I don’t know if I was the first one to use the term digital gold, but I used it fairly early. I used that a few years ago. And when I pointed out that digital currencies have different users, and bitcoin tries to be digital gold, like a digital consistent store of value.
Why is that — it doesn’t have to have ease of transactions. It doesn’t have to be — it should not actually be easy to move it around. That’s actually — the fact that Bitcoin is clunky to transact is a feature not that bad because if you want to store of value, you don’t want it to be easily stolen. So bitcoin is a heavy ponderous store of value like gold. And then there are other currencies which could have various industrial users, like I think I call the Ethereum digital copper.
I, honestly, not don’t really know enough to understand what all of those cryptocurrencies do and what could be the use cases. I cannot give you an opinion. What I think is that bitcoin has been working really hard to accumulate street cred as a store of value, because it had multiple severe corrections, but it never really collapsed, which is not how we think in bubble trades. Many people say that bitcoin is a bubble, for example, and it trades anything. It tastes like anything but a bubble, because bubbles do not do this 80% correction then rebound 80% for correction rebound.
Do you know what does that type of trading? Precious metals, and that’s exactly how cryptocurrency is trading. They’re trading as precious metals and alternative core points trading as base metals. And that is the pattern I recognized based in 2015. So for traders who want to trade cryptocurrencies, my recommendation is look at precious metals patterns and try to understand how those develop. There are all sorts of pros and cons that could be talked about whether bitcoin will survive as a store of value, what will be the adoption levels.
I don’t think that government digital currencies which is subject to digital threat to bitcoin, no more than fiat currencies that currently exist are a threat to gold. I think if every country will have its own digital currency, something that could be like not affected by central banks, like bitcoin will actually have a use.
RITHOLTZ: Interesting. So —
GUREVICH: How far it can go there, or what’s the fair value for it? I’m really not qualified to say.
RITHOLTZ: Really, really interesting.
RITHOLTZ: So let’s talk about your old boss when — when you were at JPMorgan, Jamie Dimon was — was running the shop. You’ve been pretty – you’ve offered a lot of praise to Dimon over — over the time he was there, but you also criticized his thoughts on bitcoin back in 2017. Obviously, lots have changed since then. Tell us a little bit about your thoughts of money-centered banks like JPMorgan Chase being active participants in cryptocurrencies?
GUREVICH: Well, one thing about Jamie, what I know like of how much I know him, and I’m kind of feeling awkward to stop tweeting somebody essentially by talking about somebody on podcast. But I know that he can like say things and then take them back and recognize his mistake without too much stress over that. So he’s like, “Nobody should be trading bitcoin.” And my joke was basically, “What do you know about trading bitcoin?” And I’m sure he could have changed his mind several times and laughed it off, right?
So that’s what actually makes a good manager, right? He is encouraging to people. He knows how to write — run a good bank or business success of JPMorgan — of all banks under his leadership are so tremendous and so divergent from performance of any other banks. Like, I don’t think there was ever a better illustration, a better case study of how much a CEO can make a difference than Jamie Dimon, I mean, that’s completely outlier in terms of — in terms of how much difference he made. If you track same banks, how they were performing, stock was performing relative to their peers under his rule, under his leadership, and without his leadership, and the divergence is just insane.
RITHOLTZ: Really, really, really interesting.
GUREVICH: More than one case is the case with Citibank, Bank One, JPMorgan, every single time the divergence is just out of the galaxy, how much better everything performs under his leadership. But I also was just laughing about the fact, “What do you know about bitcoin? Why do you think that bitcoin should be cheaper or more expensive or whatever?” And I sometimes make laugh — fun of myself that way as well. I think banks will have to take this into account because it’s a store of value and banks are supposed to store value. I think banks have no choice to get into the business of digital vaults, and in vaults, and institutional custody for cryptocurrency.
RITHOLTZ: Really interesting. So when you look at cryptocurrencies, are they a macro factor that you have to think about?
GUREVICH: Cryptocurrencies are becoming a macro factor. I think up to a certain point, it was a very esoteric trade, and just this one specific asset, and the only strategy I knew about this asset is to — how to buy and hold them. And when my investors were asking about this, my answer was, “Well, you can buy and hold them yourself. Why should I be doing this for you and charge you money to do that?”
GUREVICH: And lack of institutional custody was part of the issue for me. But also, I felt like I cannot really add value. I am a trader. My job is to buy low and sell high. Even though I have long-term time horizons, I’m still quintessentially a trader. So why would I be trading if I don’t — if I cannot trade cryptocurrency, why would I be holding it for — for clients?
I think now with institutional custody developing now, with the futures market, various ETFs and various options, there are some opportunities opening up for arbitrage, for various investments, and various more structured investments, and also cryptocurrency is becoming to be incorporated in the global macro picture. So definitely, it would become more and more open to — going in that direction.
RITHOLTZ: Really interesting. Before I get to my favorite questions that we ask all of our guests, let me throw a couple of curveballs at you. One from the book, “I’d rather manage money than people,” explain that.
GUREVICH: Well, so my background, I’m a summarization. I’m essentially a geek. I like playing games. I like sitting in front of screens and thinking about numbers. I like working around and thinking about charts and interrelationship between assets. I’m not the kind of person who wants to be hiring, firing, doing interviews, having a lot of chats with employees. That just not my strong point.
When I started the fund, my important condition has to have a team and have a business partner who can handle — who really can spearhead that side of the business, like money raising and just building the team. It’s — I — I think I do — I did always OK with my employees and the relationship with my employees. And people seem to — who worked with me, seem to have wanted to work with me again. In fact, one of my team members, my chief risk officer, she started working with me in the year 2000 —
GUREVICH: — back at Chase when she came to be my assistant, like my kind of second in command on my market-making desk and she’s still with me. I mean, she hadn’t been working with me all this time, but she’s on the team now. So clearly, I can have good relationships with people. But managing people is just not my passion. I never thought I want to hire 10,000 people and build a business of the scope of other big hedge funds. I am interested in writing a strategy.
RITHOLTZ: Interesting. And the other curveball, you’ve talked about you’d like to play chess. You’d like to play poker. But you’ve also described them as tools that help you with your trading skills. Tell us a little bit about the parallels how can one transfer skills from those games into trading and investing.
GUREVICH: One thing that I like to talk about and this has a lot to do with my mathematical background, that there are two components that go into trading, analysis and strategy. And you know, when you are – have a PhD in mathematics, people usually don’t have any doubt that you’re good at analysis. And analysis, whether it’s economic analysis or trade analysis, about finding a solution, about thinking what is the central scenario, what is likely to happen.
Strategy is a very different way of thinking. You — it’s when you don’t know what’s going to happen, what is your system of responses, how they’re going to respond to various scenarios. And you could be one — good at one thing and not necessarily good at the other, though, there are somewhat connected. I think I was lucky in my preparation to Wall Street that I was really involved in a lot of strategic activities, too. I did a lot of academic competitions which involves strategy. And I started to play chess very young, and then I switched to Go, which became more — more of my passion kind of throughout college and high school – so yeah, high school, college and even – and until now, I still play Go. And then I’ve learned later many other strategic games, including poker.
And that really taught me about this system of responses. You cannot just say decide what’s going to happen and that’s what’s going to happen. You must be prepared to react to things which you did not anticipate. And I think poker specifically, but — all competitive activities, but poker specifically is very good at building psychological fortitude, ability to take a loss and move on, ability to gauge whether I’m in a good set of mind to even continue playing right now. It’s never perfect. I made a lot of those mistakes, both in poker and in trading, when I probably didn’t engage my state of mind correctly.
However, it’s a good start. It’s a good background. And I did use a lot of poker analogies in my book, “The Trade of March 2020,” which in some sense, loops in earlier segment of our interview when we’re talking about positioning into March 2020. One very strong poker analogy, I thought a lot about this over my poker days, how much better you’re likely to perform if you start the night well. If you have a lot of chips in front of you on the table, you’re so much likely to play better.
So if you’re moving into the crisis, with your portfolio in a good shape, you’re so much more likely to make good decisions than when you are moving into crisis when your portfolio is under pressure. Part of it is just pure risk management, obviously. Like, if you’re losing money, you’re not going to be able to have space to take new positions. But part of it is pure psychology. You’re going to be a little paralyzed when you’re losing money. While if you’re doing well, you can be very open minded and think like, OK, I can take profits on this. I’ll take off this position. I’ll put this position. I’ll do this, I’ll do that.
RITHOLTZ: Really, really interesting. I know I only have you for a couple of more minutes, so let me jump to my favorite questions that I asked all of our guests. Starting with, you know, I was going to — one of the things I noticed in the book is there are long periods of time when you’re working literally 24 hours a day. There — there are slack messages back and forth at 1:00 in the morning, at 3:00 in the morning, at 2:00, 5:00 in the morning, West Coast time.
There were days in March of 2020, where the whole team was working 24 hours a day, days out on a time. So it kind of makes my next question almost irrelevant, but I have to ask, you know, during the pandemic, did you have time to watch TV? Were you streaming any shows or listening to anything online, or were you just, you know, pretty much 24/7 at the trading desk?
GUREVICH: I think the first few weeks were really fun here, the first few weeks of March and that’s when I’m writing the book. There was not a lot of time to do many other things, except dealing with like kids, being suddenly remote — in remote education and dealing with markets. I generally do — do a lot of things to unwind, which includes watching TV. In the first month of pandemic, yes, I started to watch TV. I was writing fiction. I was going for a lot of hikes.
I would do a lot of my work, including writing this book, “The Trade of March.” Much of it was written with a laptop sitting by the ocean, both here in California and in Hawaii. I did — I did a lot of those things. And I did a lot of things that many people do not think of doing as unwinding applies. One of the things I did during the pandemic, I watched the series of 46 YouTube videos, which were really math videos, just discussing construction really, really large numbers.
RITHOLTZ: What’s the name of that YouTube channel that you were watching?
GUREVICH: It’s — I think it’s called “Ridiculously Huge Numbers,” and it’s like 46 videos. And so I would be like, at 11:00 in the evening, watching the video about transfinite induction on fast-growing hierarchies. I have my own weird ways, but I do watch quite a bit of TV. I do like — I really like good TV. I think we do — I don’t go to movies anymore very much. I think the movies are no longer any good, but the TV shows are amazing.
RITHOLTZ: So give us a few TV shows you like and tell us — tell us what entertain you over the past couple of years.
GUREVICH: Well, I obviously love “Billions” and especially because I know in person, many people are based on. I love “Game of Thrones” because it’s a fantasy show and I know the author, and I read all his books obviously long before they came out and it’s really well done. There’s been a lot of great shows over the years. Some of them were kind of surprise shows that we’re not even made as a first tier shows originally. Like, I’m a huge fan, for example, of the ‘90s show “Buffy the Vampire Slayer.”
GUREVICH: I am a fan of the recent show “The Magicians.”
RITHOLTZ: I love that show.
GUREVICH: Yeah. I think that was a really huge upside surprise for me, how the show was done.
RITHOLTZ: Tremendous. Yeah.
GUREVICH: Yeah. I —
RITHOLTZ: That’s funny.
GUREVICH: It’s — it’s funny. It’s creative. It’s just keeps taking you to places you don’t expect to be in. I was delighted of the show. And then there were classic shows which are just really good like “Wire,” “Breaking Bad,” original “Sopranos,” “Homeland.” Those kinds of classic good — so “True Blood,” I like “True Blood” as well.
RITHOLTZ: I’m surprise given your proclivity for black hole metaphors, I’m not hearing any science fiction in that list, other than — “Magicians” is more fantasy than sci-fi.
GUREVICH: You know, I love battle — I love the new “Battlestar Galactica.”
GUREVICH: Yes, the new “Battlestar Galactica” is one of my favorites.
RITHOLTZ: So — so there are two shows I have to ask you about? “The Expanse,” which I’m up to the finale, I’ve watched everything except the last one, has been tremendous. I don’t know if you’re a fan of that sort of sci-fi.
GUREVICH: You know what, I was going to be killed for my answer on this, but I have not yet gone through “Expanse” even though I watched a few episodes. I have a particular thing and that’s probably why my — I don’t watch a lot of science fiction shows is I tend to be claustrophobic and I’m really bothered by shows which set up all on a closed space station. Somehow “Battlestar Galactica” managed to circumvent that and I was able to watch it, but the space station shows, they’re usually kind of a tough watch for me.
RITHOLTZ: And then there’s another sci-fi I’m going to recommend, there’s only two seasons of it, “Altered Carbon” was spectacular.
GUREVICH: Yeah, it was good. I watched the first season and I enjoyed it.
RITHOLTZ: The second season is that — you know, the character, human — they were people like skins. So you can change bodies. They — they do that in the second season. And it was, you know, surprisingly good and it resolves a lot of open questions. If you like the first season, I’m going to recommend the second season.
GUREVICH: OK, I might — I might come back to that. And I probably will watch “Expanse.” I love one of the authors writing for “Expanse,” his other books. And one of my favorite authors, Daniel Abraham —
RITHOLTZ: We’re going to circle back to books in a moment. Let me ask you about mentors who — who helped to shape your career.
GUREVICH: There is actually — if you look at my book, at the Acknowledgement page, there is a list of mentors there. They were mentors along my — like they’re key people obviously along my entire life, studying from my like math club mentors, to high school teachers, to graduate school professors, to my thesis advisor and people like that. When you think about Wall Street also, there were some — it’s really easy for me to remember certain key moments of mentorship. Like for example, my first boss at Bankers Trust, your boss, one, and I noticed he would say some things which really register for me forever.
Like I remember one of my early days on Wall Street, and he’s talking to a broker on the shoutbox and he’s asking about the price on something, and broker is saying, “The prices — I think I calculated the price should be 4 and 5.” And he’s like, “I don’t care about your calculation. I can do calculation myself. Where — do you have four bids? Do you have five offer?” And that’s kind of mentality which registered for me. It’s not about what you think the market should be. It’s about whether the market is there.
And going on forward, I had lots of those mentorship moments with my various bosses at JPMorgan that included Even Berntsen. David Puth, Mark Zarb, John Anderson, who was probably the person I worked really closely with during my years of proprietary trading at JPMorgan. He remained a great friend and supporter. He is currently co-head of fixed income and commodities at Millennium. People like that were super helpful to me. Each of them said, at some point, some things that really registered with me.
There was, for example, one time, which was very critical, I think, time in my career. When I came to my boss and I asked him — I told him, “This is the trade. I’m laying out this trade. This is my trade idea.” And he said, “Well, if you do this, what you’re proposing to do, how much you’re going to make?” I said, “We’re going to make $10 million.” And then he said, “OK, let’s do twice that and make $20 million.”
GUREVICH: And that was kind of an important way for me to understand you should not set your sights low in financial markets.
RITHOLTZ: How — how did that trade end up working out?
GUREVICH: We made $10 million probably.
RITHOLTZ: So — so let’s —
GUREVICH: I did not say it officially, but we made good amount of money on the trade.
RITHOLTZ: So let’s talk, you mentioned some of your favorite authors. What — what are some of your favorite books and what are you reading now?
GUREVICH: Are you mostly thinking about fiction?
RITHOLTZ: Of fiction or nonfiction, either/or, what do you like?
GUREVICH: Well, I mostly read fiction. I read some books — I read — usually I read some books related to finance, with materials related to finance, or I read — or I read fantasy and science fiction.
RITHOLTZ: Give it — give us some names.
GUREVICH: So obviously, my all-time favorite is the “Lord of the Rings.” Yeah, “Lord of the Rings.” If you say in fantasy, I love the “Wheel of Time,” which was recently made into a show. But by the way, I love on Amazon Prime, “The Wheel of Time.” I love all the works by — possibly my favorite leading author Guy Gavriel Kay. He writes a lot of historical fantasy. I like — another current author I really like is Naomi Novik.
RITHOLTZ: Give us a book title.
GUREVICH: The book — my favorite book of hers is “Spinning Silver.” But she’s also very well known for her Temeraire series which starts with a book “Her Majesty’s – His Majesty’s Dragon.” For Guy Gavriel Kay, who I mentioned earlier, his early work is “Fionavar Tapestry” trilogy. But his — his recent books, which are set up in Renaissance period, “The Children of Earth and Sky” and “The Brightness Long Ago.”
I mentioned Daniel Abraham, I really like his series, “The Dagger and the Coin.” I already mentioned to you “Game of Thrones,” both show and books. I probably could go on with a list of fantasy novels I love. Just to switch to science fiction a bit, I like “Ender’s Game” by Orson Scott Card —
GUREVICH: — some of the sequels, but not too far into sequels because they get worse.
RITHOLTZ: The first book is terrific.
GUREVICH: Yeah. I love “Ender’s Game” and it’s great. I think is great for traders and anyone interested in strategy. I like — I like a lot the Hyperion series by Dan Simmons.
RITHOLTZ: Do you – do you go back historically in sci-fi, any of the classics, or have you mostly been reading more modern sci-fi?
GUREVICH: Well, I read some of the classics by the necessity because I’m not that young. Some of the stuff that I was reading as a teenager by now is a classic, even if it was relatively modern background.
GUREVICH: But I did go a little back in history back then. Now, I tend to read mostly more modern stuff. And it’s a little — it’s a little difficult these days to read, especially science fiction, which was written even, say, in the ‘90s because projection of the near future is just so off and it’s very hard to kind of stay in a — kind of suspend your disbelief. But it all depends on the texture of the science fiction. Some of it, like for example, the novels by Dan Simmons, which are — stands really well regardless of what — regardless of the fact that there were even really long ago.
RITHOLTZ: Yeah. The more general they were about the day to day use of technology, and the more macro they were, I’m thinking of people like Asimov’s “Foundation,” or Larry Niven’s “Ringworld.” You — they didn’t talk about cell phones and personal computers. It was always massive macro engineering projects. Like the “Ringworld” as an example, that it gave it a timelessness that — that I think the people who got too involved in the day to day, you know, either they were right or wrong. And if they’re wrong, it’s hard to get immersed in that world.
GUREVICH: Yes. And there is certain — this I said on talent, about being a good futurist. Like there are some good writers who are just not good futurists. For example, Isaac Asimov, which is one of the most celebrated science fiction writers of all times was an awful, horrible, atrocious futurist. I mean, he had made completely unforgivable mistakes, and his treatment of science was outright awful and almost insulting.
RITHOLTZ: Like, I felt like he was actually insulting science by the way he was treating it. And yet his novels were innovative, creative, and very readable, and had lots of great ideas.
RITHOLTZ: Really, really interesting. Our last two questions, what sort of advice would you give to a recent college grad who was interested in the career of either investing or finance?
GUREVICH: The advice is probably similar to what I would tell anyone going into any career. First of all, if you care about financial success, you want to find the confluence of three things; things that — things that rewarding financially, obviously, just as I mentioned; things that you are good at; and things that you enjoy. So when you find the confluence of those things, if you can do something that you enjoy doing it, you happen to be good at, and they’re financially rewarding, then you’ll have a rewarding career.
And finance could very easily be that and — but even within areas of finance, you need to find your niche. I think it is – it might be not easy, of course, for a young person, but it’s very important to assess well what you’re actually good at and be realistic about that. Be very honest with yourself. What it is that I do better than any other person in the world, and how to capitalize on those things that I do better than any other person in the world. And then — and part of the reason like, for example, I write books like my book, “The Trade of March 2020,” and I’m sure there are equivalents — some equivalent books, may be different fields and subfields, is try to actually understand what it is that people do, so you have a correct idea, whether you’re going to enjoy this or not.
RITHOLTZ: Really, really interesting. And our final question, what do you know about the world of investing today that you wish you knew 25 years or so ago when you were first getting started as a trader?
GUREVICH: I think the most important thing I would have liked to know back then, that I will still be here now. The importance of that is like to understand that this is a long game, and very often it’s very easy to get impatient and think somewhat — and think somewhat short term. Like, think like, well, when you’re 20 or 25 years old, events that will happen when you’re 45 or 50 years old seem so remote, you almost don’t care about them.
GUREVICH: But the actual reality is that you do care about them.
RITHOLTZ: Really, really —
GUREVICH: The reality is that you will — then you’re 50 years old, you’re still going to want to be healthy, you’re still going to want to have money, and you’re still going to have fun in the world, right? And some of those seeds will be planted at the earlier age. So understanding that this is a long game, that you — if I — knowing back then that I will still be in this game 25 years later and I’ll still enjoy it, I would probably alleviate a lot of stress and pressure on me back then.
RITHOLTZ: Really, really interesting. Alex, thank you for being so generous with your time. We have been speaking with Alex Gurevich. He’s the founder and CIO of HonTe Advisors and the author of “The Trades of March 2020: A Shield Against Uncertainty.”
If you enjoy this conversation, well, be sure and check out any of the previous 400 discussions we’ve had over the past eight or so years that we’ve been doing the show. You can find those at iTunes, Spotify, Acast, Bloomberg, wherever you get your favorite podcasts from. We love your comments, feedback and suggestions. Write to us at firstname.lastname@example.org. Sign up for my daily reads at ritholtz.com. Follow me on Twitter @ritholtz. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Katherine Silva is my audio engineer. Atika Valbrun is our project manager. Sean Russo is our head of Research. assistant. Paris Wald is my producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.