The World’s Largest Hedge Fund Makes a Big Bet on a Market Sell-off

The World’s Largest Hedge Fund Makes a Big Bet on a Market Sell-off

Posted On November 22, 2019 2:51 pm

The world’s largest hedge fund has used options to establish a billion dollar bearish position.  Is this a big bold prediction or merely a conservative, protective action?

According to an article in the Wall Street Journal Bridgewater Associates has accumulated a massive amount of put options tied to broad indices and ETFs like the SPDR 500 (SPY) and European Pro Shares (ULE) over the past through over the past few months.

Put options give you the right to sell the underlying shares at a specified price or strike within a given time period or expiration date.

The total commitment is $1.5 billion and is focused on options with a strike 5% below current levels and expire in the March time frame.

While this is grabbing headlines for the size and the fact that Bridgewater founder and CEO Ray Dalio has become increasingly vocal about ‘broken capitalism’ and a “world gone mad”, let’s put this position in the correct context. Bridgewater has some $150 billion in assets under management (AUM), so this is a mere 1% allocation.

It also is most likely a hedge against an overall portfolio which has a clear bullish bias, with an estimated 90% long vs. 25% short positions—the 115% total is due to leverage.  The fact this leverage is down from 150% may be more telling than the put purchase.

Indeed, in the bigger picture the purchase of broad portfolio put protection seems nothing less than prudent.

U.S. equities are up 29% since last December lows and Euro based markets have had a big 15% run in just the past month.

With implied volatility, as measured by the CBOE Volatility Index, down to 12, a historically low level, put options are cheap making portfolio insurance relatively inexpensive and timely.

The time frame of the March 2020 expiration is also not random…

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.