Follow up from the previous post. Q1 2020 Hedge Fund Letters and noticed a pretty common trend – fear and uncertainty was high, but some of the more well respected hedge fund managers (O’Shaughnessy, Pershing Square, Driehaus, Fundsmith) wrote shorter letters (versus the others one who wrong longer than usual letters to their investors) than usual and they refrained on commenting on much about future return prospects.
What is interesting is not many HF’s even mentioned Fed’s ultra QE bazooka of purchasing announced in 3rd week of March 2020.
Pershing Square Capital pulled a J Paulson-like CDS contract moves (John Paulson’s 2008 CDS move which netted some $20B in $ gain in 2008-2009 was well documented in this book, which is worth a read – The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History)
The mechanism of this trade entry and exit is amazing from:
- CDS bet in yield spread widening and compression instead of CDS bet on indices, which is more volatile than indices (a 50 basis points to 100 bps jump is 100% which represents only a 0.5% increase in spread, but it takes a lot for indices to decline -50% over a short period, and which during GFC, that % decline was only touched briefly in 2008-2009 timeframe.
- Never or rather hard to sell ‘at the top’ especially when you have position of this size, you need to have exit liquidity, which John Paulson mentioned a few times in that book above during 2008
- “deterioration in the markets greatly increase the opportunity cost of owning CDS” aka they are ready to buy up equities is a statement that reminds me of this, to quote Scott Fitzgerald, ” The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
Intersection notepad 