But it’s always much easier to predict the future than to know exactly when” it will come to pass. “These trades were WMDs,” says one prominent vol manager. If over-levered baskets of pandemic-stricken businesses have made it out alive so far, what has happened with volatility investing? Why have the traders, asset managers, and institutional teams with every hedge at their disposal - and almost them alone - failed? The crash hasn’t claimed a single hotel REIT either, despite the category’s abundant debt and naked exposure to travel, which is on track for the worst year since CBRE started tracking occupancy rates in the 1930s. American Airlines is worth less than its inventory of Biscoff cookies, sure, but it’s alive. Just about every asset class and investor niche that collapsed into stock markets’ deep V has clamored up on the other side, more or less. This year, just over a month after hitting its all-time high on February 19, the S&P 500 lost 34 percent - then hit reverse. “On virtually any metric you choose, the subsequent selloff was the fastest and most violent in history,” aside from 1987’s Black Monday. March was different, explained hedge-fund manager Benn Eifert in a June letter to his QVR Advisors clients. Unlike the Covid Crash, the 2008 financial crisis was “a slow-motion train wreck,” starting with credit and collateralized debt obligations, or CDOs, and enlarging over time. The Canada Pension Plan Investment Board lost a mere C$700 million on its strategy. “You can have to sell, but if there’s no bid on the other side, there’s no buyer.” Vol shop JD Capital “got walloped,” per sources and press reports.
“With what happened in March, counterparties and markets were not functioning,” says one pension fund investor. That may not have been easy, depending on the portfolio. Graham Capital’s Jeremy Wien hit his firm’s 10 percent maximum drawdown limit and had to try to get out of positions, several sources report.
#Qvr client crashes full
Plinth “only lost” about 40 percent “because they didn’t have a portfolio full of scary stuff yet,” an associate says. Another is $100 million hedge fund Plinth Capital, founded in the Malachite model by “a reasonably nice sales guy from Barclays” with backing from a Texas institution. The severely wounded include Alberta’s public fund AIMCo, which killed its aggressive vol unit after losing C$525 ($387) per woman, man, and child in the province. They drifted from their mandate - not a good example of a disciplined vanilla put-selling program.”)
“A number of vol-related strategies haven’t fared so well, and haven’t survived - meaning total liquidation,” says Doug Kramer, quant co-chief at Neuberger Berman.įatalities include Malachite, Ronin Capital (“the plumbing just kinda fell apart,” per one vol pro), Parplus Partners, and Allianz’s ill-named Structured Alpha hedge funds. The Covid-19 Crash immolated entire firms, investment teams, and product divisions representing billions in capital. So when Malachite blew up in March, it left a hole in the ground twice as large as the fund itself. But the only thing certain about a safe bet is that, as grizzled gamblers and traders know, eventually someone gets burned. With $600 million in chips and the magic of leverage, Weinig and Aiken had bets worth upward of $1.5 billion in other people’s money on the table early this year. The hedge fund raked in hundreds of millions of dollars from charities, colleges, pension funds, and other investors during its six years of life. As a result, those tidy premiums became competition-topping returns and marketing gold. The firm also borrowed money from banks - sometimes the same ones - to make far more of these trades. Malachite led the pack in insuring banks against infinite losses during an extreme stock-market crash, all in exchange for tidy premiums. Weinig and Aiken - a confident pair of former Goldman Sachs guys, which may be redundant - said yes to exotic trades with Wall Street banks, while their competitors studied the what-ifs and frequently balked at what they found. And in 2014, Malachite founders Jacob Weinig and Joe Aiken started making the others look bad. In the gossipy and arcane world of volatility trading, just about everyone knows, and has an opinion on, everyone else. Malachite Capital Management embarrassed its hedge-fund rivals for years before facing its own fatal humiliation.
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