As Market Sagged in Q1, Many Hedge Funds Held ETF Put Options

 

It is no secret hedge funds have been using exchange-traded funds (ETFs) to make directional bets on a broad market index or a specific industry group. They frequently buy “call” options or hedge with “put” options. Sometimes they hedge by shorting the funds outright.

This said, one of the interesting unnoticed themes to emerge from the recent wave of quarterly 13F filings, which take a snapshot of the portfolios of equity investors on the final day of the first quarter, are the number of high-profile hedge fund managers who took new put option bets to hedge their exposure.

In many cases, these are hedge funds that don’t typically have a history of investing in ETFs. This hedging strategy so far has proved to be a prudent move, given that the stock market has sagged since its strong, double-digit first-quarter surge.

According to David Beth of institutional options and ETF execution firm WallachBeth Capital, “While we continue to see increasing ETF exposure on the part of our hedge fund clients, many of whom necessarily layer option strategies to hedge directional bias, we’re also seeing noticeable upticks insofar as traditional long/short managers initiating the use of  ETF options as part of a fundamental risk management approach.

Added Beth, “While the more sophisticated focus on strategies that can profit from changes in volatility and skew over both short and longer-term horizons,  even the most elementary strategies that use puts and/or calls are certainly gaining favor with long-established and well-respected hedge funds as well as other institutional client profiles.”

At the end of the first quarter, activist investor Trian Fund Management held puts on an ETF that tracks the direction of the S&P 500. It did not hold this position at the end of the prior quarter.

Tudor Investment Corp., headed by macro legend Paul Tudor Jones II, reported holding puts on at least four different ETFs at the end of the March quarter covering the following indexes — S&P 500, Russell 2000, Nasdaq 100 and gold.

What is especially interesting is that Tudor had no puts on ETFs at the end of the fourth quarter. There is no way of knowing which, if any, of these positions were taken by Tudor BVI, the fund Jones himself oversees.

At the end of the first quarter, two other large hedge funds held puts on iShares ETFs that track the Russell 2000 — New York City–based Perry Capital and Boston-based Highfields Capital Management. Neither of them held this position at the end of the prior quarter.

Highfields’ put position was especially large, ranking among the firm’s top five holdings in its $9 billion-plus equity portfolio. At the same time, it held long positions in the Russell 2000 Growth fund and Russell Midcap fund.

In the fourth quarter, Perry Capital’s only ETF position were puts on iShares ETFs that track the performance of the MSCI Emerging Markets index.

Louis Bacon’s Moore Capital Management has been an aggressive user of ETFs for a number of years. In fact, they partly account for Moore’s more than doubling of its equity assets in general in the first quarter, to $6.3 billion — a lot for a macro manager not generally known for its stock investing.

And puts accounted for about half of Moore’s roughly two dozen ETF positions. They include bets on declines in the S&P 500, high-yield bonds, China, homebuilders, industrials, oil, consumer discretionary stocks, materials and financials. Full article at Institutional Investor.com

 

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