A hedge fund betting on turbulence raked in a 400% return last quarter as coronavirus sent markets spinning, report says
- California hedge fund LongTail Alpha saw one of its funds post a 156% gain in March, the Wall Street Journal reported, bringing its first-quarter return to 400% on bets for a jump in market volatility.
- The firm's chief investment officer, former PIMCO manager Vineer Bhansali, didn't forecast the coronavirus pandemic, but instead positioned LongTail to gain from an unforeseen market threat.
- LongTail added to stock- and bond-market positions earlier in the year that stood to gain from a sharp increase in market volatility, The Journal reported.
- Bhansali long argued that post-financial crisis policies stifled volatility and formed an environment where an unexpected trigger could drive outsized market swings.
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A hedge fund that doubled down on bets for a volatility spike posted outsized gains when the coronavirus intensified, according to a report from The Wall Street Journal.
California firm LongTail Alpha saw its OneTail Hedgehog Fund II post a 156% return in March alone, bringing its first-quarter return to 400%, the Journal reported Thursday, citing letters sent to the fund's clients. Its TwoTail Alpha Fund inked a 65% gain through March.
The firm's chief investment officer, former PIMCO manager Vineer Bhansali, didn't forecast the coronavirus pandemic, but he positioned LongTail to make major profits went the outbreak sent the financial sector into a downward spiral. The US stock market slid into bearish territory through early March, while the market for Treasury bills faced an unprecedented lack of liquidity.
The Cboe Volatility index - or VIX, commonly known as the stock market's fear gauge - peaked at 83 on March 16 and remains at its highest level since 2011.
While the government has propped up the sector through fiscal and monetary policy, the heightened market volatility benefited LongTail's hedge positions. The firm added to stock- and bond-market holdings earlier in the year that stood to gain alongside fresh market swings.
LongTail's chief investment officer believed volatility would rebound after post-financial crisis central bank actions pushed it to new lows.
Bhansali co-wrote a paper in 2017 with a University of Southern California finance professor arguing that "the extraordinary growth of short volatility strategies" stood to drive a "serious market crash," the Journal reported. The coronavirus has since introduced the spark for a violent jump in uncertainty and risk.
"I continued to believe that such volatility, though temporarily suppressed, would always rear its head somewhere unwittingly and without much warning," Bhansali wrote in the April letter, according to The Journal.
The fund held $126 million in assets under management at the end of 2019, but the sum has since tripled, a source familiar with the firm told The Journal.
LongTail isn't the only fund to profit amid the virus-induced chaos. Universa Investments, led by Mark Spitznagel, took in a 4,144% gain in the first quarter through a similar tail-risk strategy. The investor told clients the global pandemic risks were "there for all to see" and that the event wasn't some unforeseeable "black swan."
"The world remains very much trapped in the mother of all global financial bubbles," Spitznagel said in a letter shared with Business Insider.
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