Some of the biggest, most high-profile hedge fund firms cranked up their hedges in the second quarter, according to an analysis of the recently filed 13F disclosures covering the period.
Firms including Caxton Associates, Soros Fund Management, Passport Capital and others used puts on various exchange-traded funds to hedge their portfolios, with some adding to these positions in a big way from the first quarter to the second. Most of the hedge funds that hedge or make long bets with ETFs or options on ETFs are macro funds, multistrategy funds or eclectic funds that roam the investment world looking for value. It is very rare to see funds known for fundamental long-short equity investing, such as those managed by the so-called Tiger Cubs, invest in ETFs.
At the end of the second quarter, Andrew Law’s New York–based hedge fund firm, Caxton, whose flagship macro fund, Caxton Global Investment, gained nearly 16 percent in the first half of the year, invested about 28 percent of its $1.9 billion U.S. equity portfolio in put options on a variety of ETFs, according to regulatory filings. Among Law’s biggest bearish bets in the second quarter were puts on the SPDR that tracks the S&P 500 and the iShares ETF that tracks the Russell 2000.
In the prior three-month period, Caxton had virtually none of these kinds of hedges. It had only about a dozen very small long positions in ETFs that track narrowly focused markets or stocks of individual countries.
George Soros also aggressively boosted his hedges with ETFs in the second quarter. Puts on several ETFs accounted for more than 17 percent of the $9.2 billion in the Soros Fund Management equity portfolio.
By far Soros’ biggest negative bet — and the largest position in his portfolio — was a $1.25 billion put on the SPDR that tracks the S&P 500, more than triple the position he had in the ETF at the end of the first quarter.
John Burbank III’s San Francisco–based Passport, which invests mainly in equities, also has a large hedge on the market. A short position in an iShares ETF, including options, that tracks emerging markets accounted for 20 percent of the Passport Global Strategy fund’s exposure at the end of July, according to a client report. The fund also had a smaller short position in a Vanguard ETF that tracks emerging markets.
Louis Bacon’s New York–headquartered Moore Capital Management does not have a big percentage of its equity assets in ETF puts. Even so, it increased its bet against the fund the tracks the Dow Transportation index more than fivefold. In addition, one of its largest holdings is puts on the PowerShares ETF that tracks the Nasdaq 100.
Richard Perry’s New York hedge fund firm, Perry Capital, which started out as mostly a risk arbitrage fund but now is a more eclectic event-driven fund, reported a $465 million position in puts on the iShares that track the U.S. real estate market. This bet alone accounted for 12 percent of its $3.9 billion equity portfolio. Like many hedge funds, it also likes to make upward directional bets with ETFs; its largest holding was a $650 million bet on calls on an ETF that tracks the S&P 500.
London-based BlueCrest Capital Management, which manages a total of $18 billion, has only about $1.9 billion in its U.S. stock portfolio. Of that amount, 30 percent was invested in the puts of ETFs at the end of the second quarter; the biggest position was a negative bet on the portfolio tracking the S&P 500. Other firms with puts on ETFs include Paul Singer’s Elliott Associates, which has a number of negative bets that account for 7 percent of its $5.1 billion equity portfolio.
Some firms removed their big ETF hedges in the second quarter. For example, at the end of March, Point State Capital, which was founded by several individuals who previously worked for Stanley Druckenmiller’s Duquesne Capital, had about 18 percent of its roughly $6.9 billion in equities devoted to puts on ETFs, including a close to $1.2 billion bet against the direction of the SPDR that tracks the S&P 500.
However, by the end of the second quarter, Point State had removed all of these hedges, and it had no exposure to ETFs at all at the end of the second quarter.
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