With $750m in assets under management, US-based high-conviction hedge fund One River Asset Management is a relative minnow when it comes to market value.
But the Connecticut hedge fund, which runs five volatility and trend strategies, is emerging as one of the major hedge fund winners from the Covid-19 market turmoil. One River's discretionary long volatility fund was up 34.9% in March and 49.6% in the year to date. Its systematic Dynamic Convexity fund was up 37.4% in March and 45.8% in 2020, according to figures seen by Financial 新闻.
"Our five strategies are built to profit from such a dynamic environment ... they’re unique," One River chief executive and CIO Eric Peters noted in a client investment note earlier this month.
In an interview, Peters said his firm's uniqueness derived from not drowning in leverage and being properly prepared for the escalation in risk. He said he sees the fund doing "very well" by riding choppy markets for years to come.
"It's what we built our strategies to do," he said. "Over time, I've done better in periods of real change and dislocation than in some of the longer periods of relative calm. A good part of that reason is that in some of the long calmer periods, the people who get paid the most in markets are people willing to run very leveraged portfolios who earn carry but they're extremely susceptible if the market has a dislocation. Often those people lose large portions — if not all — of their investors' money. I'm constitutionally not built to do that."
The firm focuses strategies that it has built on opportunity, as well as risk. "Within each of our strategies we have built a strong risk mitigation into everything that we do. One of the great things that does is it protects investors and capital and makes a lot of money when things dislocate ... that's what makes our philosophy around how to manage money unique. The cost to us is we can't manage as much money in our strategy as our peers but the benefit accrues to our investors."
This approach, Peters added, meant One River was able to nimbly ride last month's explosion in volatility.
The firm had a long position in stock volatility going into mid march, right before the Vix "fear index" surged to historic levels, Peters said, "but then we covered most of our long equity [volatility] as we saw some of the large players getting stopped out in mid March which was good because equity [volatility] came down a long way."
"But we've rotated a lot of our risk into emerging markets. It's likely we have quite a severe emerging market crisis ahead, not just because of the virus, but because of this move toward de-globalisation."
Peters says that far from markets settling down, this is just getting started.
"I don't think this dislocation is even remotely close to being done — this is the first stage in a multi-year, major dislocation," he said. "We came into this crisis with corporations and investors extremely leveraged, with lots of risk and leverage on their books. As big as it was, they were all geared to this notion of very low economic volatility ... we have this enormous shock and naturally it's going to create a big first move. But that really is just the first move because this shock is going to reveal the level of leverage on the corporate balance sheet side but also the amount of risk that investors have taken to try to hit these return targets."
But Peters warns that it will also "reveal some of the fragility in the overall economic fabric of this country [the US]". He said: "We should never have allowed our economy to be as financialised as it has been. It's just astounding and literally an outrage that we have allowed the borrowing and buybacks that we've seen, only to have these companies hit the wall economically and run to the government for bailouts."
The outlook for One River will be smoother sailing than for the wider global economy, according to Peters. "The interest we're seeing from investors is pretty extraordinary right now," he said. "We're going to do very well over the next few years."
To contact the author of this story with feedback or news, email Tom Teodorczuk