https://www.bloomberg.com/news/arti...ght-posts-6-6-january-drop-at-main-hedge-fund David Einhorn’s Greenlight Capital hit a wall in January as its main hedge fund fell 6.6 percent, its worst monthly performance since October 2008. In a note to clients, the firm attributed most of its poor performance to losses in the last week of the month. “Our long portfolio only achieved about half the S&P 500 return, while our short portfolio went up more than twice the index,” Greenlight wrote, adding that many shorts rose 15 percent or more. “We believe the valuation spread between our longs and shorts is as wide as we can remember.”
I don't get it! Shorting is supposed to be a hedge. And like any insurance policy, hedging is expensive. Why do these "Gods of Trading" use shorting and hedging as a core position? Why not stay neutral and generate some alpha, even if it doesn't beat the S&P???
How do you "stay neutral" without having the same exposure of longs and shorts in a book of equities ?
Through Options and Stat-Arb Pair trading techniques. I get it! Einhorn went all short on AMZN! He had an expression that it was overbought and shorted it. So, the question is how did he hedge against that position? Did he construct Call calendar positions for the case AMZN blows to the upside? Did he go long on AMZN's pairs; Walmart? NFLX? Home Depot? My portfolio was long on AMZN and I had long call positions from AMZN at 970 (everything got liquidated today with AMZN at 1434. Needless to say this was a great month for my fund. But I was constantly hedging against this position by selling weekly straddles and long puts, in case AMZN reversed. This also helped me stay in the position and ride the profits. The hedge cost me 15 to 20% not bad since AMZN rise generated a 15,000% return on my calls ($3 calls were unloaded for $450 between earnings cycles ... better than crypto!) Now my expression for AMZN is neutral to slightly bearish! I believe AMZN will consolidate and will be range bound between 1350 and 1450 for the next 2 earnings cycles and have bought 4 bearish butterflies that should decay into profit, if AMZN stays range bound. If it does well, I'll add more. If it blows up, big move either side, I'll unload for a 50% loss. Today's earnings, will provide short term vega crush, I'll be watching this closely. Here's my PUT bearish butterfly ... Gamma neutral. Slightly positive delta due to AMZN/NDX tanking from its high. Neg Vega and Positive theta as the hedge should slowly decay into profit if AMZN is range bound and enough time for expiration to make adjustments. Now that's a hedge for a move either side! Still praying it be a small move,
Options give you a delta exposure and stat arb is a very niche strat that's often applied in an HFT context. Most HF try to hedge their beta exposure to the maket by keeping a book 50% short 50% long (hence they're called Long/Short Equity).
If he wanted to short AMZN with a hedge, he could have played a covered put. Sure, his gains are limited but it gives a little protection and time also works for him, instead of against. For example right now the ATM puts (1400) with 42 days expiry give 5% protection. If he is right, making 5% in 5 weeks ain't bad....
We've been in discussions with some family offices and it appears that the long/short equity models is waning in favorability due to healthy economy / raging bull market and the challenge of identifying good shorts. What's been more popular, at least from my discussions is a blended model of long equity and shorts through an options portfolio. Granted the funds are a fraction of the sizes compared to Einhorn's holdngs. Einhorn bet against AMZN. That stock had a 30% run-up in the last 100 days. Unfortunately, too much of a wrong bet. What's more surprising is, if his teams were analyzing AMZN, they would've immediately seen that that the stock had been consolidating for a few months. They should've planned for high probability "POP" up on a 9 year up-trending stock. By stat-arb, I meant low frequency pair trading. Few underlyings had a run-up like AMZN's. NFLX (33%) and Nasdaq (14%). Did he go super long on those? I'm curious to see how the fund's other hedge construction. If we could figure it out from the sec filings. Considering AMZN's reach into every walk of life today (retail, technology, consumer staples and now healthcare), AMZN's only correlating pair would be NDX, :/ Are you in the industry?