“50 cents” fund earns $ 2.6 billion by buying collapse protection

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London investment fund dubbed “50 cents” for buying cheap protection from sharp drops in share prices generated about $ 2.6 billion in a series of transactions in March, offsetting losses from sale caused by coronavirus.

The Covid-19 epidemic ripped the global financial markets last month, dropping the S&P 500 index more than 30% to its nadir and pushing the Vix volatility index – also known as the “gauge of “fear” of Wall Street – higher than the levels seen during the 2008-2009 financial crisis.

Westminster-based Ruffer, which has about $ 23 billion under management, said it made more than $ 800 million from a $ 22 million purchase of derivative contracts that follow the Vix and profits in the event of rising, which usually happens when stock prices fall sharply.

Another gain of $ 1.8 billion came from other equity, gold and credit derivatives that protected against the manager’s losses. Overall, Ruffer’s flagship fund, Total Return, lost 0.8% at the end of the first quarter.

The Financial Times previously reported that Ruffer was the mystery fund that benefited from similar volatility trading during a milder episode of turbulence in February 2018, buying Vix derivative contracts costing half a dollar each and earning itself. even the nickname “50 cents” after the American rapper famous for the album Get rich or die Tryin ‘.

Following this episode, Vix trader Anthony Cooper made a wooden sign with the word “Bearsville” on it and hung it on the door of Chief Investment Officer Henry Maxey. Maxey said he remained bearish, even after the recent liquidation, predicting a wave of corporate failures as large debt loads become unmanageable with the global economy locked out.

A sign made by Ruffer’s Vix trader Anthony Cooper and hung on the door of the CIO Henry Maxey after a stock market volatility crisis in February 2018 © Anthony Cooper

“I think the United States is going to see a massive default cycle,” he told the FT. “It is too big a shock to be absorbed. You can’t just put the whole economy on freezing. “

The fund made approximately $ 350 million * from a $ 18 million purchase of put options on the S&P 500 and Euro Stoxx indices, which gave Ruffer the right to sell at a fixed price, even after the sale accelerated. He also avoided defaulting gold in his role as a safe haven, pocketing around $ 145 million.

An additional $ 1.3 billion came from the purchase of credit derivatives that hedged against a dramatic drop in corporate bond prices. The trade had similarities to that of Bill Ackman, whose Pershing Square fund offset losses from his own equity portfolio with a $ 2.6 billion profit on credit default swaps.

Maxey said the fund’s strategy to hedge against volatility using Vix derivatives has now become too expensive as the index remains high.

Instead, he turns his attention to expectations of rising inflation and a weaker dollar, in part because of the onslaught of stimuli provided by the intervention of the Federal Reserve in the markets. financial and budgetary support from the United States government. Maxey has already started buying inflation-protected Treasury bills and believes the Japanese yen could also provide cover against further turmoil if the dollar weakens.

“I won’t say I won’t use Vix anymore but I don’t think I will for a while. It was a time of regime change, ”he said. “The essence of it all was protection. We have behaved in a dull manner for years and that is partly due to the fact that we feared such a sale. “

* This article was updated shortly after its publication to clarify the amount of put options

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