This hedge fund is surging despite coronavirus volatility

One River CEO Eric Peters joins Yahoo Finance’s Zack Guzman to discuss how his hedge fund is performing amid the coronavirus.

Video Transcript

ZACK GUZMAN: Meantime, though, of course, this is all translated into uncertain times and volatility in the stock market. We've bounced back quite a bit, though, from those late March lows. That, of course, made some people winners and some people losers, depending on how you were playing it. I want to get to our next guest, who was among the biggest winners when we look at performance. That, of course, being One River CEO Eric Peters, who joins us.

One of his funds was able to recover, up by about 50% since the crisis began here on that long volatility fund that he manages. And Eric, when we look at this, I think a lot of people will be wondering, if you were able to put it in performance like that through all this volatility, I guess the question becomes, how are you changing your strategy now, and do you think that the volatility that we've seen in US equities is over now? Are we out of it?

ERIC PETERS: Thanks for having me, Zack. I appreciate it. Look, I think we've started a multi-year process of real adjustment in the economy, in politics, in markets. And I think we're seeing some unbelievable policy that's being implemented right now. So we're really-- in so many ways, we're in uncharted territory.

From our perspective, we anticipated for a while now that the end of this cycle would be marked by a really explosive move in volatility equity market. But in a multi-stage crisis-- and we think we've entered just such a crisis-- you see these things play out in waves. So the first wave in this one was clearly in equities. Our view is that it will soon transition into quite a profound crisis in emerging markets.

So we've shifted. We shifted mid March our exposure from being long equity volatility into positions that are more focused on a range of different emerging markets.

ZACK GUZMAN: Yeah, it's interesting that [INAUDIBLE]-- particularly on the US equity front here too, because that's obviously what we mostly cover here. But it is interesting, just because if you are turning that trade, that strategy off, then I would suspect your expectations for future volatility to have come down as well.

It's not necessarily what we've seen play out, but an interesting poll from UBS Global Wealth Management among some of the most wealthy asset managers, here looking at them and what they think, those that have at least a million dollars in investable assets or in annual revenue. 61%, 61% say they want to see equities for another 5% to 20% before buying, while 23% say it's already a good time to do so. So if you've changed your strategy here and capitalize on that volatility, it seems to me that you would be saying, there's not going to be as much volatility moving forward. So is that kind of your outlook?

ERIC PETERS: Well, not exactly. Like any market, volatility markets rise and fall, and the best benchmark for that is just looking at what the VIX index is doing. And so the VIX index got up to around 80, and is now back into the 30s.

I think it could-- look, the support that we've seen from the central bank and Treasury is unprecedented. And those policies are intended to boost asset values and reduce volatility. I think that they've worked so far.

The disconnect is that the real economy, it's in a depression. We're in a global depression right now. The only question is how quickly we get out.

And so one of the large questions to be asked is, at what point do asset markets, or financial assets like equities, come back into line with the real economy? Our guess is that this strong support from the central bank and Treasury may last somewhat longer, and that may reduce volatility in equities. But those would be levels that we want to be re-involved in. Again, this is going to be a multi-year process. This could last for a decade.

And just in terms of the changes that we're going to see underlying the real economy, and markets, and globalization, and politics, and things like that, so we'll be playing that intermittently in terms of our positioning. But when the volatility levels get extreme and people are stopping out, we're going to have a tendency to be reducing those positions. And then as things normalize, we'll get re-involved.

ZACK GUZMAN: Yeah. And you guys have about $750 million in assets under management when we look at this too. So if you are shifting a lot of your focus to the emerging market side, speak to me a little bit more about that, because we did have Mark Mobius, who obviously made a name for himself in emerging markets, telling us that there might be an attractive opportunity right now to look into. When we look at that, is your theory basically that the central bank here in the US has been proactive about this, and that might not be the case in some more emerging markets? They might get caught here? Or is it more a volatility play on currencies? What are you looking at specifically in emerging markets that look so attractive?

ERIC PETERS: Well, for starters, look. Emerging markets, their policy tools-- the policy tools that they have at their disposal are quite limited relative to what the Fed has. Our reserve currency status gives us a lot of latitude to, in many cases, print money, issue large amounts of debt. Emerging markets don't tend to have that luxury. And so they have limited policy tools, which makes it more difficult for them to support their economies.

But the broader structural problem that I see with emerging markets, and where perhaps Mark is wrong-- he's certainly a great investor. I think for decades now, big, big sell-offs have been meant to be bought in emerging markets, at least for a trade. But what I see very clearly is that we've entered into this new period of deglobalization. So these economies have been economies that have invested vast amounts of money in building infrastructure that has allowed them to participate in a growing global economy and supply the US with goods, in some cases, services.

What appears quite clear at this point is for the last year and a half, two years, we've been moving toward deglobalization. And I think this virus breakout, this pandemic is accelerating that trend. And so these economies are going to be built for a robust global environment where economies are doing well, there's a lot of international trade. And in an environment where that trend reverses, these economies are going to suffer in extreme ways.

And so again, this is a multi-year trend. Right now, vols in these markets are pretty low, so we're involved. But I don't expect that to continue. I think that their equity markets will continue to fall. Their currencies will come under a lot of pressure.

ZACK GUZMAN: All right, there you go. Perhaps the next wave to come. Calling from a man who called the first wave here in the US. Eric Peters, One River CEO. Appreciate you taking the time, sir.

ERIC PETERS: Thanks for having me.