We have already mocked the so-called marquee "hedge" funds [6]for their deplorable August performance to the point where there is little to add, suffice to repeat that one really should i) scrap the phrase "hedge funds" entirely and just call these formerly insider trading and colluding vehicles "massively beta-levered funds who pray every day that the Fed does not lose control" and ii) stop paying 2 and 20 for underperforming the S&P for seven years in a row.
Because after August one thing is clear: nobody actually hedges (and why should they: the LP already has collected all the upside, while the downside loss is all other people's money) and if the market crashes, hedge fund LPs funds will not only suffer outsized losses (while underperforming stocks on the way up) but also be promptly gated and have no access to any funds until the Fed (hopefully) bails out the financial system once again.
Of course, not every asset manager falls in the above generalization; only about 98%. There are some outliers, such as Mark Spitznagel [7]'s Universa which as we reported last week [6]made a whopping $1 billion profit on the one day when the market crashed and countless hedge funds not only lost billions but were margined out on their profitable positions.
Another hedge fund that actually hedges against the kind of fat tail event that nobody else had even remotely considered, is Artemis Vega Fund, whose exemplary writings and market analyses have repeatedly [8]appeared [9] on these [10] pages [11].
In Artemis most recent letter from July 18, the founder Christopher Cole when discussing "the greatest collapse in the history of the VIX index [12]" said:
I can only point to government intervention as the core reason. I firmly believe that this moral hazard produces a hidden leverage and “shadow market gamma” that at some point will result in a sustained volatility outlier event in the opposite direction.
One month later, he was proven to be 100% correct, and the result was a monetay, literally: as the following letter to investors released earlier today reveals, the fund made a whopping 15.5% on September 1, 2015, the day the S&P dropped 3%. Which, for those who have forgotten, is what is really known as hedging.
The full letter from Artemis Capital Management [13] below:
September Mid-Month 2015 Market Update and Commentary (Confidential to Artemis Investors)
As markets continue to experience significant volatility I wanted to provide an update as to the performance of the Artemis Vega Fund LP. As discussed in my August 26th letter to investors convergence in the forward volatility curve has been highly beneficial for Artemis.
Artemis Vega Fund LP and associated institutional managed accounts gained approximately +15.49% gross of fees on September 1, 2015 on a day the S&P 500 index lost -2.96%. Please note this performance was for the day. Overall, Artemis is up approximately +18.11% (before fees) from August 1 to September 1 including an estimated +2.27% increase in August (all final numbers subject to change and review by administrator). The S&P 500 index has fallen -9.03% over this time frame. This is your crisis alpha in action.
In my Sunday, August 23 letter to investors (prior to the VIX spike), I indicated that our machine learning models were on their highest risk warning registering a 29% probability the VIX would spike above 40 in the immediate future. While this warning proved prescient what should be noted is that we do not see any considerable change in the fundamental and technical conditions that generated the initial warning. Our models currently register a 30% probability the VIX will re-test highs above 40 in the next 21 days.
We continue to see excellent opportunity in positive carry and positive convexity positions and will continue to hold positions so long as those conditions persist. Our dynamic volatility portfolio has held up well into this morning’s minor market rebound, however markets remain in flux and September performance numbers are subject to change. Any volatility persistence above 30 will be highly advantageous to the fund (I would urge investors to re-read my August 23 and August 26 letters for the full rationale on our current positioning). To this effect you still have substantial crisis alpha coverage to buy equity beta into further weakness in markets.
