This hedge fund saw the risks of coronavirus very early on. Now it’s 36% more

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Chris Hansen saw it coming.

Hansen, who heads San Francisco’s hedge fund Valiant Capital Management, had an early belief that the new coronavirus would wreak havoc on the global economy.

Hansen and his team looked into the risks posed by the virus early on and placed bets accordingly, said people familiar with the business. At the end of January, Valiant reinforced its bet against the stock market indices by being more concerned about the virus.

In February, Valiant began placing bets on, or shorting, leveraged companies it believed were likely to suffer from an economic downturn caused by the virus. As the market collapsed, Valiant made gains on these bets, including cruise lines, international airlines and travel agencies. In early March, the fund had started to bypass less obvious candidates, believing that those with weak balance sheets and companies deemed fraudulent would be caught in a prolonged slump.

At the end of March, Valiant was up 36 percent for the year before fees, people familiar with the business said. The yield contrasts with a 19.6% drop in

S&P 500

and a 21.3% drop in the MSCI All World index, a large global index measuring the performance of stocks around the world.

“Protecting capital from downturns has always been at the heart of our strategy and, once again, it’s nice to see it pay off when it matters most,” wrote Hansen in a letter to investors from 12th of March. The letter told investors that the fund had increased 25% before fees and did not say how Valiant scored the gains.

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In addition to its equity bets, Valiant also made credit protection gains on the high-quality, high-yield global bond indices it bought in mid-February, which became more valuable as the likelihood of business failures was increasing, said one of the people. The fund had closed half of this hedge a month later.

The returns for Valiant mark some of the best returns in the hedge fund industry through the market turmoil to date.

A discreet investor known on Wall Street for his short sales and investments in private companies, Mr. Hansen is best known in certain circles for his efforts over many years to bring a professional basketball team to his hometown of Seattle. He was a brutal messenger when it came to the coronavirus. At an investment conference in Jackson Hole, Wyo., On March 5, he told an audience of wealthy families and private investors to go get money, get drugs and prepare for the pandemic to fundamentally change lives.

“It was aimed at an audience of 80 or 90 people and said that 10 to 20 of us would likely contract the virus and that many of us, statistically speaking, would die,” said Matthew Lusins, partner at a real estate private equity firm. Convergence Investments, which organized the charity conference.

Lusins ​​said Hansen asked for a list of international attendees before agreeing to speak at the conference and did not interfere afterwards.

Short-circuited companies and hedging portfolios have become outmoded in the past decade, as low interest rates have propelled stock markets to historic highs. While hedge funds betting on and against stocks should not follow a roaring bull market, periods of sustained underperformance can lead to investor frustration and defections.

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Valiant, founded by Mr. Hansen in mid-2008 after leaving hedge fund company Blue Ridge Capital, was not immune to the pressure to keep up.

The fund posted gains of 8.2% and 13.1% in 2008 and 2011, respectively, and gained 73% in the months the S&P declined, according to investor documents. However, its investor base had shrunk as its focus on brokerage firms it deemed fraudulent or misleading to regulators and shareholders had detracted from returns. Valiant also holds the stock of about two dozen companies at one time and has held its largest positions for more than five years on average. In separate structures, it invests in private companies, mainly in the United States and India.

But the fund continued to sell individual stocks and pay hedges – measures that have proven to be profitable in the market turmoil this year.

When the stock markets began their roller coaster descent in late February, the $ 1.4 billion hedge fund also began to profit from the bets it had made against companies it considered months fraudulent or fragile or, in some cases, years ago. The company also cashed put options, contracts that give the owner the right to sell stocks on a certain date at a specific price, they bought at low prices against stock market indices in the United States and India, according to people familiar with the business. .

Valiant bought more put options on the stock market indexes in late January as it became more concerned about the virus, said a person familiar with the business. The move pushed the size of its index covers to an all-time high. At their peak, the notional value of option contracts was between $ 1 billion and $ 2 billion, coverage equivalent to the size of Valiant’s portfolio.

China’s massive quarantine of Wuhan from January 23 and later in the month of Hubei Province, where the coronavirus first appeared, was a key signal that the virus was a serious threat, said someone close to the fund. The fund was also influenced by Harvard epidemiologist Marc Lipsitch and other healthcare experts, who sounded the alarm in January.

The stock market climbs higher as China shuts down and the virus spreads in South Korea and Italy, recalling other moments of extreme dissonance for the Valiant team, such as the market crisis. housing or the Internet bubble, said people close to the firm.

In recent weeks, Hansen has told investors that Valiant has little advantage over the virus now that it has reshaped everyday life and the economy so dramatically.

Write to Juliet Chung at [email protected]

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