Looking for Trends: One River Asset Management’s Eric Peters

0:05Welcome to another episode of Goldman Sachs exchanges great investors. I'm Tony Pasquarello, Global Head of Hedge Fund Coverage in Goldman Sachs Global Bank and Markets. And today I have the pleasure of sitting down with Eric Peters. Eric leads both Coinbase Asset Management, a digital asset manager wholly owned by Coinbase, and One River Asset Management, an alternative investment manager focusing on risk mitigation and trend strategies. He is also the author of the widely read newsletter, Weekend Notes. Eric is an intellectual force within our industry. He consistently offers up deeply thought out research and quite often highly provocative ideas about the investment landscape.

0:46I always come away from our conversations with a slightly new way of looking at the world. And I'm sure this conversation will be no different.

0:57Eric, welcome to Great Investors. Thank you. That is very kind. Let's go back to the beginning of your career. You got your start in the trading pits in Chicago. Are there some lessons that you still carry with you today from the days of Open Outcry? Oh, many. They're almost entirely risk management. I started trading my own money. So I figured out my senior year in college that I wanted to trade. Okay. What did you study? Economics. Yep. Which wasn't really, honestly, it's not that relevant. But I actually met with all sorts of people who did different jobs, very successful people. And I stumbled across someone who became my mentor out in Chicago, who was a very successful trader.

1:36and I concluded I'm never going to be bored doing this. And I've always wanted to do something on my own, so I didn't go to Wall Street, just there. I'd made some money. I had some businesses in college, so I made some money. Okay. Just packed it up, went out there, and yeah, when you're trading your own money and you're a young guy or an older guy, it's sobering. And this was the corn pit? Corn pit. How'd you pick corn? I was told that you lose less money in corn, and I didn't have much money to lose, so I figured, you know what? let's start there. Back in those days when you got a seat on an exchange, and it was a little exchange, we traded out lots.

2:12You'd go through this orientation class and it was look left, look right, and not many people are going to make it. And that's, it was all about survival. Because within two years, almost everyone from that first class of 30 was gone. And how long did you do it? I did it for two years. Yeah. Okay. Yeah. And then quickly, the career path from there, what came in between Pitt and One River? I lost that mentor tragically. And so I had a bit of a soul searching period. I almost joined the military. I thought maybe finance isn't for me. I'd done well, but, and then I got through someone at Lehman Brothers, a very senior person there, talked to me and just said, you know what?

2:51I think you should come here. Not many people do what you've done. You should just, just give it a try. And I had told myself I was never going to Wall Street. So I was like, two years in, I'm going to go to Wall Street again. Got it. Okay. And after a year, I was convinced that I really didn't want to be on Wall Street. But my boss sent me to London and he just said, listen, I know this is not your scene. So why don't you? And what I mean by that is I think I've always just been a pretty independent builder type person. And it was just bureaucracies are not really my thing. So he said, go out to London.

3:24It's very entrepreneurial out there. People are still smoking on the desk at the time. It was non-developed by US standards kind of business. And he just said, just figure out how to make money. and I'll support you. And I got there at an amazing time, which was the ERM crisis. And so we figured out how to make a lot of money. This is the early 90s? Early 90s. Yeah, I got there in 91. And then I ended up staying at Lehman for a bunch of years. I was a prop trader, credit Swiss, took a year off, climbed mountains, which was another whole new form of risk management, and started a company during the dot-com period, a financial company, which was my first real operating experience of a significant company.

4:03Sold that in the 04 or something like that, and then went back into trading. First for myself, then a couple of hedge funds as a macro PM, and then started OneRiver in 2013. Okay. In my mind, part of what you do is macro, an emphasis on trend following, and part is whatever we want to call it, digital crypto. As we sit here today, How do those two worlds complement each other? I'd say what we do is, what we really do at One River is risk mitigation, and we're highly opportunistic. And so trend following is part of that, but long vol is a much bigger part of our business. And we kind of bring those two things together as risk mitigants for our clients.

4:43But we're always on the hunt for things. And just as a macro investor, you don't know anything too deeply, which is both a strength and a weakness. But you can cover a lot of ground. And so we got into crypto in 2020. We'd done very well for clients through the pandemic. And then the question was, okay, what next? And one of our biggest clients and I were both very interested in what crypto could represent in terms of an expression of monetary debasement theme. And so we made a very large investment in November of 2020 that tripled over the next year. And we got out, by the way, and returned all that capital.

5:20Hopefully the biggest redemption I'll ever have. But we built a business around that as well. And so I think digital, I saw digital as being probably a 10-year theme, and I wanted to be part of it. And so we just built out a part of the business. So I think the biggest thing that we do for our clients is bring risk mitigation together with their existing portfolios to help them compound at a better rate than equities. But we're always on the hunt for what's next in terms of risk or opportunity. Got it. You mentioned fall strategies, hedging strategies. it's a relevant thought these days and people are worried about valuation and worried about concentration hedging though hedging is not easy going home long fall every day is a is an expensive proposition and so how do you think about that i think probably because where i started my career i'd rather go home long a bit of all than shortfall okay and that's just part of who i am and quite frankly i've made a lot more money during really disruptive periods than not but i think what most investors think when they think hedging is they think it is really hard because it is, but they don't quite think about it in the right way.

6:25And let's talk about the really big investors. The really big investors go, look, I have so much money that how can I hedge it? It's just not possible. And actually I have long duration money in a lot of cases on pension plan, endowment. Sure. And so why don't I just ride out any down draft? And so I think that they think about it a little bit the wrong way. The way I think about it is if you have good hedges in place and you combine it with your portfolio so that you don't really, you don't use some leverage, so you don't have to take risk off the table. Then when something happens, you actually have your hedge, which produces a lot of cash.

7:05When mentally you're probably prone to make some pretty bad decisions. You're like, I've got this big pile of cash here. Maybe I can use it for some of my redemptions or to pay the endowment's budget or to buy some really cheap assets here. And I think that's really the right way. Holistically, that's the right way to think about hedging and what we do. And I think you really can compound better than just being long risk assets if you have that dynamic in your portfolio. And as we sit here today, just given the setup, given vol surfaces, is there anything that looks particularly compelling to you?

7:41Vol's pretty cheap right now, just as a general matter. But I think you have to be dynamic. I mean, one of the mistakes that I think a lot of investors make is they're looking at their portfolios right now. They're going, really high valuations. I don't know about next year. Who knows what's happening geopolitically. Vol's cheap. I'm going to put a big hedge on. And what most of them do is they lock in a strike price. And yeah, they got cheap vol, but they don't know when the crisis is going to happen. And so what if the market rallies 10 % or 15 % and then falls 25 %? It's going to feel pretty awful on the way down, but you don't really have that much convexity.

8:17You don't have a great hedge in place. So I think the key is being really, really dynamic. And people are worried about valuations right now, as you should be. All right. I want to talk about trend, trend following investing. It's a big part of your approach. What's the framework right now? How do you approach that business today? So just stepping back on trend following. So I think all great investors are trend followers. They just are. Like, because what are you doing when you're trying to capitalize on a trend? You are foreseeing something, some dynamic that the market underappreciates today, and you believe will somehow get priced in over some period of time.

8:54And if you're an investor, it's not over a week, probably not over a month, probably over at least a few quarters, maybe a few years, maybe a decade. Like I was talking about crypto. I think crypto, I saw that as probably a 10-year trade. We're halfway through it. And you still have that view? It's about 10-year trade? Yeah, I think that's about right. We were getting into Bitcoin at 15 ,000. It's 85, 90. It's got a probably long way to go, and we're halfway there. But anyway, trend following, I think, as a great investor, all you're looking for are trends. And so the question is, how do you capitalize on those?

9:26And there are, at the highest level, there are two ways of doing it. One is systematic and one is discretionary. And I think the best performing investors through time will be the discretionary traders who are exceedingly good at identifying trends fairly early. They don't have to be their one, but in the first quarter of some type of new dynamic that's going to move something. And then they concentrate their investments in a fairly narrow space. Could be a stock or a sector or a country or a commodity. And then eventually they get out. The other way to do it is systematically. And the advantage with doing it systematically is you take the emotion out of it.

10:07You spread your bets across. We'd probably trade 150 markets, let's say. Is that right? Yeah. So you spread your bets across all these different markets and you can essentially capitalize on trends that if you were trying to make discretionary decisions, inevitably you'd never make, or you might make some emotional mistakes somewhere along the way. And so you're not going to make as much in that strategy as the best discretionary trend identifier, maybe someone like Soros, who was great at that, but you do very well. And the advantage of that as well is you can capitalize on periods that are pretty big dislocations, things that you didn't really see coming.

10:48It just wasn't on your radar. It could have been like this gold move, or it could have been in 2022. By being in trend following, you capitalize on the down move in equities, but also the down move in bonds, which is a huge correlation breakdown. So as an investor, a typical investor, you had built your whole portfolio betting on that correlation remaining intact, and it went the other way. So trend had a terrific year that year at a time when most portfolios really didn't. When we combine long volatility and trend following and equities when you combine them in a leveraged way and if you look back starting at 2007 let's say the S &P is up six to seven x combination of S &P and properly built hedges is up like two x that and S &P hedges and trend following is up like 40 x By the way, it's not intuitive.

11:46That's something that early in my career, I didn't really appreciate. But now I do. And so the biggest investors in the US, that's the kind of thing that these guys are looking at. Okay. And then how do you know, this is the hard question, but how do you know at the end when it's time to ask for the check? How do you know before the big reversal comes and the end of the move comes? Or you just say, you know what, I'm going to make as much money in the belly of that move as I can, and I'll probably get hurt at the end. but that's life in a discretionary and i always think about discretionary because i you know we think about how to how do you codify discretionary thought processes into our systematic strategies but in a discretionary sense i honestly do not think it's valuation i think it's just being able to identify when people who have been betting against a trend are feeling maximum pain and i think you can't teach that.

12:43Unfortunately, I wish I could have learned that in textbook. You know, I've felt enough of those moves where I actually, there are times where I actually, I feel a certain way and I know that's wrong. Like I know that I want to get out of something and I know, okay, I'm sure this is wrong. It just is. I've seen, I've felt this before, but it also, you know, if you feel something in yourself that other people, you know, the market's filled with people like you. And that's what makes highs and lows on a systematic or with a systematic strategy. It's a bit different. You need to have a set of rules.

13:15And I think what I just described is it's not possible to codify, unfortunately, if we ever figured it out, we have the magic money machine. But I think that there are all sorts of ways just in looking at momentum rollovers, but also we're doing all sorts of research on more fundamental factors that can anticipate changes in trends. We've got some great AI machine learning types of things. I'm sure everyone is working on those things because there's so much data in the world and there are interesting ways of thinking about it and manipulating. I think what we bring to the market is just a very strong discretionary fundamental approach that we then work to try to codify.

13:55But I think, you know, it's not easy is the answer and you do the best you can. And you hope that by spreading your bets across 150 markets and running a pretty high vol that over time you generate meaningful returns. Sure. And is there anything today you find, any trends you find particularly compelling or any that you feel like are probably in their last innings? If we talk about it at the highest level, I think the most important trend that is unfolding in the world from an economic perspective, let's set geopolitics aside, is this debt expansion. Just because this probably not what you were looking for.

14:31But like, we can talk about specific markets. But I think that's the most important factor here is that there seems to be little to no spending restraint anywhere in the world. There's some places that are doing trying to do a little bit better job with it than others. The US certainly is not. And I think that if I reflect on my career, which started in 89, we've had these series of financial crises and policy responses. And the policy response is more or less have grown increasingly aggressive. And the government has taken on more of the private sector liabilities, expanded debt, and tried to create this ongoing prosperity with very little interruption.

15:12And so now you're at a point where I think the size of government debt, unless we have a real productivity boom, which by the way, we might, but the size of that debt and the interest obligations are pushing the government to make all sorts of financial repression decisions and Great decisions. And it probably leads to a very large financial crisis here sometime over the next decade. I think that's the most important trend to pay attention to because in a lot of ways, most things feed off of that. I think what's happening in equities, what's happening in policy, what's happening in gold, what's happening in oil, feed off of that dynamic.

15:49And the path along the way is higher rates, steeper curves, more term premium or not necessarily? I think that what the government has already begun and is committed to is, and I think, by the way, it's sensible. So this might sound like a criticism. I think if you and I were running the government, we would do something more or less in the same zip code. I think we're trying to figure out how do we run the economy as hot as possible, but with an emphasis on making sure that we clear as many roadblocks for AI development as possible, which is electricity and permitting and all these things. And then do everything possible to make energy as cheap as we can, which I think is a very deliberate strategy and probably part of what's happening in Venezuela.

16:37And to try to keep inflation down to the greatest degree possible. And then do everything possible to manage interest rates lower so that the actual interest burden is as low as it possibly is. And if you can make those things happen, I think you have a pretty good outcome. By the way, I think we still end up with a crisis down the road because I don't think you're going to see the political establishment become more austere. So I think what that does, that combination of policies pushes that problem out three years, five years, maybe longer, probably not longer. And that'll feel really good, by the way, during that period of time, that'll feel great.

17:14But I think you'll still see these spending dynamics and you'll see whatever the crisis that comes in the backside of this AI boom is, and I think it will be significant, you'll see an overwhelming policy response. So I think you should see steep curves, and you probably do, but I think there's going to be a lot of policy action to bring those curves flatter as well. Okay. Let's talk about crypto for a minute. Let's talk about Bitcoin. We're roughly 30 % off the highs of October. What's been kind of going on the past couple of months? God, the price action has been terrible. Yeah. Which goes back to, like, how do you know when trends are over.

17:50There was a lot of excitement at the highs. I think, number one, I'll say I don't know, but I think this is my framework for it. I think that you had a rush of essentially Wall Street guys that came in and just built all these digital treasury companies. And obviously, MicroStrategy was the pioneer in that space, but there have been so many others that have come after that. And I don't think they provide massive value for the economy. And I think they front loaded a lot of demand and they created a hype cycle under themselves and they kind of raced forward and brought a lot of future Bitcoin demand forward.

18:28And then you just hit a point of saturation for the time being. And then there's a lot of leverage in the system that was betting that was going to propel us to a higher level. It could have, but it didn't. You kind of ran short of buyers. And then the dynamic on a market like this is once that happens, it starts going lower. And I think that's happened at a time when the AI theme has been so explosive, gold has been, and Bitcoin is very much a momentum trade. If you look at over a few month period, even over a year period. So when a lot of the people who had been deploying capital there started losing money and looking at these other things are making money, I think you started seeing rotation.

19:08And now what you, I would say now where you are in the cycle is you see people actually getting really bearish on it. They're like, well, there are quantum computing risks to Bitcoin and there are, you know, which I don't think are going to manifest by the way. But those are the things that I've seen through a few cycles. Now you get toward the bottom, people start looking for reasons why it's going to a much lower price. And then some dynamic will shift. Maybe it's the silver to Bitcoin ratio, which means nothing, but it's so wide or it's the catch-up trade. It'll start moving and those others will stall.

19:42And so I think we have significantly higher prices given policy activity. But I think that's what's been happening. And it's painful when it happens and everyone's like, why is it happening? And then big picture, do you have a fundamental framework for the asset class? So part of me thinks Bitcoin's a bit like gold in that it's whatever one wants it to be. There's no fair value. There's no yield. There's no intrinsic value. And so in the end, it's really subject to narrative and flow of funds. But am I missing something? Am I missing a fundamental anchor point in your view? Bitcoin is so many things.

20:17We could spend a lot of time talking about Bitcoin and we probably shouldn't. There's plenty to read about it. But I think that one of the things that Bitcoin can become is it could become a blockchain or digitally native form of collateral that governments really can't interfere with. And gold is such a thing. Gold is worth a lot more. If Bitcoin were worth as much as gold, it'd be like$1.3 or$4 million Bitcoin. 30 trillion assets. And it's not, right? So gold can be used like that, right? We've gone through this period really throughout both of our careers where probably the greatest form of collateral has been US treasury bills or bonds or dollars.

21:03And you could, you know, they're fungible. You can post them as collateral and margin. But in a world that's fracturing, which I think we are, we're probably creating a few spheres of influence around the world. And U.S. is probably Western Hemisphere. And Europe and Russia have to figure it out. And China will have the East. And I think there's a growing interest by lots of governments in the world to not be on the dollar system if they can avoid it. I think Bitcoin serves as a potentially a great form of collateral that can be moved instantly, effectively at zero cost or at close to zero cost.

21:42And so I got excited about blockchain because I saw the promise of that type of world, not necessarily where Bitcoin is that source of collateral, but that technology. But Bitcoin could become that in this world. And so in a low trust world where you can't just trust that if you put your money into treasuries, you're going to get it back, which Russia just discovered it can't put their money into European banks or US banks or anything because it can get confiscated. You could use gold, but you actually have to store gold somewhere. You have to dig it out of the ground, then you have to put it back in the ground, and then you have to associate it with a token.

22:16And then you have to secure it, and you have to make sure that no one's going to take possession of that wherever it is in the world. Whereas Bitcoin actually is the first big scale asset that could provide that source of collateral that no government in the world can touch. So I think if I were to look out over the next 15 years at what could be its biggest value, I think that could be its biggest value. Now, it's still too volatile, really, to fill that role at scale. But it's getting there. It has that chance. So if I were to think about what's the potential big win for Bitcoin, that's probably what it is over the next 15 years.

22:52Could become bigger and better things over a longer period of time. But that's kind of it. And in the meantime, it's still a highly speculative asset. And bigger players are getting involved and some of the early players are getting out and moving on. So it's interesting. Yes, wildly. Yeah. One more question, one more formal question. You occupy a bunch of different places in the asset management business. You have the trend following piece, you have the digital piece, you have the volatility piece. If you were to hazard a guess what your business or just kind of writ large, the asset management business looks like in five or 10 years, do you have a strong instinct?

23:26Lots can happen in that period of time. Or one of the big things, one of the big dynamics that we see happening and I see from my seat at Coinbase is this wealth transfer from baby boomers to younger people is, it's game on. So the way that people invest in trade is going to shift from certainly you're younger than I, but certainly from my generation older to, I think, more of a speculative kind of investment mindset. I think a lot of what's happening in blockchain and DeFi, actually over the next couple of years, is going to find its way into traditional markets. There are going to be people posting all sorts of new collateral to get leverage to take other risks.

24:12And so I think we're going to end up in quite a speculative market, which means the highs will be higher, the lows will be lower. I do think over the next decade, we're going to have this debt sustainability crisis. It could be soon. So if the AI theme really craters, I think we see a huge recession in the US and then we see massive stimulus and you have debt sustainability concerns. And that's a crisis that starts looking a lot more like 08, but even bigger because the government's not going to be able to bail out the market the way it has in the past because it's the source of the problem in many respects.

24:50So I think that will change the nature of markets. So I think you're going to have younger, more speculative, skewed markets. Young people have a lot of money to speculate with. I think you'll see a great move into robo-advisors. So a lot of young people, I mean, we're working on some of this stuff right now, are going to turn to AI to help them make investment decisions. I think that'll probably change the nature of some of these markets. And I think in the background, you're going to have this big debt issue, which ultimately leads to some kind of inflation. And I think that will change the nature of the asset management industry.

25:24I don't think that AI is going to make all investors obsolete. And at the end of the day, people with a lot of money, maybe someday they just give it to a machine. I don't think that's the case. I think firms like ours will, as long as we stay curious and nimble, I think we'll do really well, grow a lot. Let's finish with the proverbial lightning round. What's your greatest strength as an investor? I think I triangulate really well, which just means probably like you, I talk to a lot of people. I've cultivated a group of really smart and insightful investors and traders that I talk to and I read a lot.