Chatter about a multi-billion-dollar levered options strategy fund getting caught offside (and being forced - by its own strategy's hedging requirements - to buy into the rally, acting as the 'catalyst' for the almost unprecedented move) have been rife all week and our discussions of Catalyst Capital's NAV collapse - coinciding with the longest streak of gains in stocks in 4 years and VIX decoupling - led to a statement to CNBC earlier that their position-squaring was complete.
Now, Catalyst Capital CEO Jerry Szilagyi has reached out to Bloomberg to clear up any misunderstandings...
“Our exposure was greatly exaggerated, and our impact on the market was greatly exaggerated,” said Szilagyi by phone. “Comments that we were forced to short cover are not correct. We haven’t been forced to do anything.”
“There may have been some market impact from our trading earlier this week, but it’s certainly not the majority of the market impact, by any stretch,” said Szilagyi. “Probably Donald Trump’s tweets have had a bigger impact than our trading."
“We’ve communicated with our shareholders over the years that this is the type of environment that’s the worst for the fund,” said Szilagyi.
“We’ve had losses before and when this happens, we’ve covered our positions, and when market conditions are more favorable we’ll get back in.”
All of which makes perfect sense, but here are a few other points to consider...
1) Fund collapses most in its history
2) Options volumes explode
3) VIX decouples from stocks for longest period since election
4) S&P rises 7 days in a row - longest streak in 4 years on NOTHING
5) Fund drops 7 days in a row
... we no longer have that type of short position at this time. Consistent with our overall risk management strategy we have some draw-downs where we decided to take action and we are pretty neutral with our positions at this point.
We finished adjusting the portfolio.
I've seen some things in the press about the fund and short term forced-buying, we've had no margin issues.
The fund is under no duress or anything like that. We weren't forced to sell."
All probably just coincidence.
But then again, of course, what else would one expect the CEO of a major financial institution to say when his firm appears to be in trouble...
Catalyst Capital CEO Jerry Szilagyi to Bloomberg in 2017 - "It's just people looking to sensationalize things and make headlines," adding that "our exposure was greatly exaggerated, and our impact on the market was greatly exaggerated."
Bear Stearns CEO Alan Schwartz goes on CNBC in March 2008 and assures viewers that the firm has ample liquidity. "Part of the problem is that when speculation starts in a market that has a lot of emotion in it," Schwartz says he has numbers to back up his insistence that the bank's position is solid.
The first rule of crisis management... "blame the speculators"
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As an addendum, InvestmentNews.com reports a 'cautionary tale' about Catalyst Capital...
The Catalyst Hedged Futures Strategy Fund was up 6.2% last year, head and shoulders above the average managed futures fund, which fell 2.8%. Performance like that caught investors' eyes. The fund's assets soared from $1.2 billion in 2015 to $2.2 billion at the end of 2016.
Just one problem: It wasn't a managed futures fund.
"It was miscategorized," said Morningstar (MORN) analyst Jason Kephart, noting that Morningstar analysts don't cover the fund. The Catalyst fund uses put and call options on Standard & Poor's 500 stock futures, with the aim of reducing volatilty and overall correlation to the blue-chip index. Morningstar moved the fund into the options writing category Feb. 1, Mr. Kephart said.
Presumably, the fund's name had something to do with its mislabeling, since it had "futures" in it. And when the fund converted from a hedge fund to an open-end fund in September 2013, Morningstar didn't have an options writing category, said Jerry Szilagyi, CEO of Catalyst Capital Advisers. "That's not the best fit, either," he said. "The fund is unique. There really isn't a good category for it."