Trend Following and Dynamic Hedging Enhance Returns Amid Debt Crisis

Key Quotes

"Many they're almost entirely risk management I started trading my own money so I figured out my senior in college that I wanted to trade what did you study economics yeah which wasn't really honestly is 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 on Chicago who was a very successful trader and I concluded I'm never going to be bored doing this so and I wanted 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 in college I had some businesses in college so I made some money 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 get into 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 it was a little exchange we traded out lots you'd go through this orientation class and it was look left look right and not many people 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"

Eric Peters explains that his early career in the trading pits, particularly trading his own money, instilled in him a deep understanding of risk management. This foundational experience, gained before formal Wall Street training, emphasized survival and the harsh realities of financial markets. Peters highlights that this direct, personal risk was more impactful than his economics studies.

"I'd rather go home long a bit of vol than short vol 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 they think it is really hard because it is but they don't quite think about it in the right way now 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 pension plan endowment sure and so why don't I just ride out any down draft and so I think that they they think about it a little bit the wrong way because 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 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 when mentally you're probably prone to make some pretty bad decisions"

Eric Peters advocates for a proactive approach to hedging, preferring to be "long volatility" rather than short. He suggests that large institutional investors often misunderstand hedging by viewing it as an impossible task due to their scale, opting instead to simply endure market downturns. Peters argues that well-placed hedges can generate significant cash during crises, preventing poor decision-making and allowing portfolios to compound more effectively.

"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 and 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 is probably a 10 year trade we're halfway through it and you still have that view it's about a 10 year trade yeah I think that's about right like we were getting into bitcoin at 15 000 it's 85 90 it's it's got a probably long way to go and we're halfway there"

Eric Peters posits that all great investors are inherently trend followers, identifying and capitalizing on market dynamics that are not yet fully appreciated. He defines trend following not as a short-term strategy but as a long-term endeavor, potentially spanning quarters, years, or even a decade, citing the example of crypto as a ten-year trade. Peters believes that successful investors foresee future market pricing and position themselves accordingly.

"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 to fill that role at scale but we're 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 could 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 moving on and so it's interesting yes wildly"

Eric Peters suggests that Bitcoin's most significant long-term value over the next 15 years could be its role as a government-resistant, digitally native form of collateral. While acknowledging its current volatility prevents it from fulfilling this role at scale, he believes it has the potential to become a globally accessible asset that governments cannot easily interfere with, especially in a fracturing world where trust in traditional financial systems is diminishing. Peters views this as Bitcoin's potential "big win," even as it remains a speculative asset in the interim.

"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"

Eric Peters emphasizes that One River Asset Management's primary function for clients is to provide risk mitigation strategies that complement their existing portfolios, aiming for superior compounding returns compared to equities alone. He states that the firm is continuously searching for new sources of risk and opportunity to offer clients.

"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 but 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 are 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 responses 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 and 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