The son of a physician and with a penchant for math, Andy Redleaf came upon options in high school, even before they were listed on the CBOE.  Post college, Andy landed in an option trading role and was making markets on the CBOE during the 1987 stock market crash. In his rendering, the introduction of stock index futures dramatically increased correlation among stocks and the creation of portfolio insurance left some investors short a put that no other investors were long.  In combination, this left the market vulnerable to such a sharp one day plunge in stock prices.  Our conversation considers market stress periods in the context of the neat mathematical models and their simplifying assumptions that may be enablers of these seismic events.

We talk as well about Andy’s hedge fund career, first co-founding Deephaven and then founding Whitebox.  Both ventures were focused on exploiting mispricings in complex securities such as convertible bonds and the relative value between equity and corporate credit securities.  As the head of Whitebox for two decades, Andy oversaw the firm’s expansion into a global multi-strat fund that traded all asset classes and through periods of vol both high and low.  Our discussion brings to life the instability that Andy saw lurking beneath the surface of calm markets in the period prior to the financial crisis.  He shares his analysis of the wholesale mispricing of mortgage risk that was evident in the statistic that nearly 90% of the refinancings on New Century’s book increased the amount owed from the original mortgage.  This, Andy suggests, is an indication of a more desperate borrower.

As we explore the important risk events that have helped shaped Andy’s philosophy on risk, we also pivot to the financial climate that is today.  Andy is skeptical that ultra-low interest rates are stimulative and sees the decline in interest rate income as a headwind for consumers who are trying to reach a specific financial goal through savings.  Today, Andy is principal of Park Financial Group, a firm finding opportunities to prudently lend in today’s climate of highly bifurcated credit allocation.  I hope you enjoy this episode of the Alpha Exchange, my conversation with Andy Redleaf.