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The VaR Problem (w/ Eric Peters) | Expert View | Real Vision™

2,569 views · Published 26 June 2018 · 4:18 · Indexed 24 October 2026

Channel: Real Vision Presents · 2018 · News & Politics

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Eric Peters, CEO & CIO of One River Asset Management, joins Real Vision to discuss major changes he sees coming to the global macro landscape. He thinks U.S. equity markets are in the process of topping, and says both inflation and volatility will make a comeback. Peters also analyzes the problems with risk management and portfolio construction, and how they will likely be challenged during the next recession.

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The VaR Problem (w/ Eric Peters) | Expert View | Real Vision™
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Transcript: 
When I was a prop trader at Lehman in the early '90s, markets were very volatile then. And we managed our risk in the way that people managed risk forever, which is essentially you'd look at your positions, and you'd say, how much would I lose if I were stopped out. And your boss would ask you, and your boss would tally all of that risk up, and you'd have a general sense for how much risk you took as a firm. In 1994, '95, we were introduced to this thing called VaR, Value at Risk, which was new. Everyone today thinks that that's just the way risk is measured and has always been measured, and it's just not. But we took a look at it, try to understand what it was, because management wanted us to look at our positions through this VaR lens. And we thought it was just foolish, which it was. But we also recognized that if you were trying to assess the overall level of risk for a really large, complex portfolio, it was deeply flawed, but it was probably better than almost anything else that you had. Because it's just unrealistic to look at your stop-losses across the whole firm like that and tally them up. Fast forward a couple decades at this point. Every portfolio in the world looks at risk exactly the same way. They look at risks through the lens of VaR. Large pension plans, they may just look at the overall vol of their portfolio. But in essence, everyone in the world is using the same measurement of risk. And what's incredibly interesting is that not only are they using it to measure their risk, but they're using it to kind of calibrate their whole portfolio so that as they observe this thing called VaR or vol for their portfolio, and as it moves lower-- and central banks have intended to push it lower-- it allows them to take more risk without their portfolio looking like it's any riskier. In fact, if they do nothing with their portfolio and vol comes down, it looks like they're not taking that much risk. In fact, they may be taking just as much, potentially even more. And so what's happened is all these portfolios globally have been taking on more and more risk as the central bank policy has suppressed vol. And it becomes a reflexive process, because the more risk they take, what are they doing? They're putting their money into risky assets. And as they buy those assets, inevitably the volatility of those assets comes down. It ends up showing a lower vol, or a lower VaR number. And so, in a sense, the more risk they've taken, the more they've suppressed risk themselves and suppressed vol. So it's a reflexive process. And you don't see that many of those in your career. I've seen a few of them. This is clearly one of them. And so that type of reflexivity, meaning lower vol begetting lower vol, will work in reverse when vol begins to move higher.

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