Tag Archives: macro strategy

leveraged ETFs

The Big Short: Leveraged ETFs, By David Miller

The Big Short is coming to a theater near you soon, but the hedge fund industry’s cool kid of the year David Miller has traded ahead of his peers by exploiting and being short of the popular ETF industry product: leveraged ETFs  and “inverse ETFs”; products that are typically powered by futures contracts so as to magnify returns of a move in a particular index.

Exchange-traded funds that employ derivatives or futures contracts have [rightfully so] been the subject of increasing scrutiny of late, a topic discussed more than once by MarketsMuse. As tweeted earlier today by our curators, the SEC which is notorious for chasing horses after they’ve left the barn, is now taking an even deeper dive towards determining the efficacy and credibility of these testosterone-charged ETFs—albeit putting the Genie back in the bottle will prove non-trivial for regulators. That said, one macro strategy-centric hedge fund manager is exercising his fund’s trade strategy options by leveraging the short-comings of these products by systematically shorting a laundry list of the so-called 2x and 3x return products, and he’s been smiling all the way to the top of the list of 2015’s best performing HF managers.

As reported by Reuters’ David Randall, the $155mil AUM Catalyst Macro Strategy fund, run by 35-year old David Miller is the cool kid of the year for using exchange-traded options to short leveraged exchange traded funds that offer two or three times the daily positive or negative return of an index and which have become increasingly popular among hedge funds and other traders as the broad U.S. market has flatlined. Leveraged ETFs have seen inflows of $9.5 billion this year, according to Lipper data.

Here’s the opening excerpt from Reuters’ reporting..

david miller catalyst macro…. Miller’s $155.6 million Catalyst Macro Strategy fund, has posted returns of nearly 47 percent over the last year by focusing on the flaws of levered exchange-traded funds. That performance makes Miller’s fund the best performer among all actively-managed equity funds tracked by Morningstar this year, and nearly 20 percentage points greater than the next-best performing fund.

The average hedge fund, by comparison, gained 1.1 percent over the same time, the lowest return since the average loss of 5.4 percent in 2011, according to BarclayHedge.

At the heart of Miller’s strategy is a bet against what he calls “structurally flawed” ETFs. He has a list of approximately 100 such ETFs, nearly all of them leveraged, that he uses as the basis for his trades.

Miller’s base case is that most leveraged ETFs are poorly designed because the nature of compounding wipes out their gains over time.

An investor who puts $100 into a two-times leveraged fund realizes a gain of 20 percent if the index it tracks goes up 10 percent in one day. Yet if the same index goes down 9.1 percent the next day to fall back to its starting point, the same investor who had $120 will realize a loss of 18.2 percent – or $21.84 – and be left with just $98.16.

Miller uses options to hedge his holdings, focusing on making bets that an ETF will have choppy trading rather than sprinting off in any direction, a strategy that he says limits his losses.

For example, he has a net short position on both an ETF that offers a triple positive return of an index of Russian stocks and one that offers a triple negative return of the same index based on the idea that Russian stocks tend to be volatile.

Indeed, both funds are down this year significantly, while their underlying index, the Market Vectors Russia ETF index (NYSE:RSX), is up 22 percent. The bullish fund down 27.6 percent while the bearish fund is down 66.9 percent.

To be sure, the strategy is not foolproof and carries risks of its own, including high trading costs incurred from frequent options trading and the risk that a leveraged ETF goes on a prolonged run beyond Miller’s strike price, leaving him on the hook for theoretically unlimited losses.

At the same time, the U.S. Securities Exchange Commission proposed a rule on Friday that would force ETFs to limit their derivatives exposure, potentially forcing most leveraged ETFs to shut down [L1N1401IW]. In that case, Miller said he would be forced to pivot his options strategy to focusing on “inconsistencies” in the futures market for commodities.

So far, Miller has been able to hedge away most of his losses. He has a net short position on the ProShares Ultra VIX Short-Term Futures ETF (NYSE:UVXY), a fund that returns two times the daily performance of the S&P VIX Short-Term Futures index.

The fund shot up more than 11 percent on December 9 of this year. Yet Miller is willing to look past such daily losses and focus on the long-term tendency of leveraged ETFs to “decay,” he said. The same fund he has a net short position on, for instance, has a 78 percent decline for the year to date.

Fund experts say that Miller’s strategy of using options to short leveraged ETFs is unique, but does not have a long enough track record to be judged as anything more than a fluke.

“This is quite rare to find any fund that is using this as part of their strategy,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

At the same time, Miller’s short track record is its own risk, he said. His strategy “has worked out excellently this year for this fund, but it’s still only one year of performance,” he added.

Miller, meanwhile, says that he has such a long list of what he calls poorly thought-out ETFs that he feels no need to hope that the fund industry keeps introducing more of them.

“There are so many terribly designed products out there already,” he says.

(Reporting by David Randall, with additional reporting by Saquib Ahmned; editing by Linda Stern)
Read more at Reutershttp://www.reuters.com/article/us-catalyst-fund-etf-idUSKBN0TW0TX20151213#mdFJfVOuVEKxhbSp.99

Semiconductor ETFs: Having Sight Beyond Sight; Look Out Below?

Below extract courtesy of today’s a.m. edition of macro-strategy commentary from Rareview Macro’s “Sight Beyond Sight”

1. Taiwan equities were cut to equal-weight from over-weight at Morgan Stanley (Jonathan Garner) on valuation concerns.
2. Morgan Stanley recently cut Asia’s semiconductor industry to equal-weight from over-weight.
3. Maybank, a local house, cut Taiwan Semiconductor (symbol: 2330 TT) to sell from hold. This is currently the only sell rating on TSMC.

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

If it were not for Russian equities falling on account of the new round of sanctions the Taiwan Taiex (symbol: TWSE) would be showing the largest negative risk-adjusted return in equities for the second day running. Taiwan Semiconductor closed down -4.6% last night. Taiwan Semiconductor holds a ~12% weight in the Taiex. This is a dramatic fall as it is not considered a high beta stock.

Compounding the matter further the Asian weakness followed on from Sandisk dropping by 10% after-hours due to a poor earnings release. We are not going to pretend that we know anything much about Sandisk, except that that it makes memory cards, but what we do know is that the professional community leaned very long into this earnings event. Furthermore, this follows the short-covering in Intel (symbol: INTC) that these same investors who are very overweight semiconductors used as a funding leg (i.e. short position) to pay for them. We still cannot believe Intel is/was the most heavily shorted name in the Dow Jones Index given its 35% run higher. That is a lot of PnL pain to endure, to the point where you have to truly believe your longs are going up even higher to make up for it.

The other issue is this profile: Continue reading

Markets Mauled Today: A Rareview Macro-Strategy View

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

Below excerpt courtesy this a.m.’s edition of macro-strategy newsletter “Sight Beyond Sight”

Today is the first time in recent memory that investors are waking up to a meaningful gap down in US equity index futures.

By virtue of the fact that S&P 500 futures were down ~1.0% at one point this morning, the 57-day streak with no 1% up/down move in the index level has finally been broken today and that is clearly a talking point.

The other interesting observation for US equity participants is that Russell 2000 futures (symbol: RTAU4) are currently down -2.2%. That is much more than the German DAX -1.6%) and commensurate with the weakness in the Spanish IBEX (-2.5%) and Italian MIB (-2.15%) indices.

Given that investor sentiment is also very fragile at the moment, and despite this being a very immature approach to investing and nearly always misguided, the fact is a 2-3% move lower in the index always triggers calls for a larger 7-10% correction.

Our view is different. Continue reading

Don’t Sell in May and Go Away…

rareview sbs logo   Excerpts from this a.m. edition of Rareview Macro “Sight Beyond   Sight” could be comforting to those who “don’t want to sell in May and go away”

* tickers referenced in the a.m. note include :

• The Argument for S&P 500 to march to 1950 and beyond … the risks of a “deflationary shock” have also begun to be priced back out of the market. Clearly there have been many “false starts” on this theme in the past, and this could just be another one. But the difference this time is that the conditions are now in place for stabilization in the rate of inflation.
• a lot of professionals de-risked and the assets that were sold-off will need to be re-redeployed elsewhere. The key point is that the S&P 500 will have a difficult time falling beyond what already occurred in April without those assets being first reinvested.

Neil Azous, Rareview Macro LLC

• Thematically, we are very sympathetic to the view that a fundamental shift in the market will occur over the next 6-18 months: business-to-business (B2B) will benefit more than business-to-consumers (B2C).
• As a result of this migration into capital expenditures, the top down investment views expressed around housing and corporate share repurchases will be paired back as investors cannot hold all of these macro themes at once. To be clear, this is not a call that buybacks will slow down materially or that the stocks that have benefited the most from this capital redeployment will start to fall. It is a call that buyback strategies will underperform the capex theme even though both could rise at the same time

• the traditional “sell in May and go away” rule will not hold true coming back from the holiday break this year.
• We believe that alongside a basket of long “capex plays”, i.e. US energy and the US Dollar, there is also room for a short Gold position
• We initiated a starter short position in Gold last night

To read the entire morning missive, you’ll need to get your subscription to Sight Beyond Sight…10-day free trial with no credit card required can be secured via www.sightbeyondsight.com

Macro-Strategist Rareview: Pause in Mean Reversion

rareview sbs logo Below excerpt courtesy of this a.m. edition of Rareview Macro’s “Sight Beyond Sight”
“..The call today by the professional community for a retracement of the recent weakness in Equities is very loud…

This viewpoint disregards the fact that S&P 500 futures are already 2.5% higher than Monday’s intra-day low. The key point being is that with the last price in index futures at ~1848 the market is right back at the 50% retracement of the April high (~1892) and low (~1803).

Neil Azous, Rareview Macro LLC

In our view this thought process misses the point. The real takeaway is that after weeks of instability many are finally resigned to a pause in the mean reversion of last year’s strategies. This also includes a contraction in the very high intra-day volatility. Meaning, the peak-to-trough index ranges should narrow into option expiration.

While we do not fully agree with the shift in sentiment we are mindful that the price action argues in favor of a retracement in certain strategies and we will adjust some positioning in the model portfolio to be prudent..

Firstly, the model portfolio pre-market closed out the entire short Small Cap (IWM) and long Large Cap (SPY) relative value strategy. We covered the IWM short for 112.22 and sold the SPY long at 185.36. While we still believe this is a great intermediate-term theme the fact is that we never thought we would be able to generate more than 5% of outperformance this quickly relative to when we deployed the strategy on March 19th. We will look to re-initiate this position in the near future if it were to retrace 3-4%.

Continue reading

US Interest Rates: Lower For Longer

Below excerpts courtesy of “Quigley’s Corner”, a daily summary of debt capital market activity from Mischler Financial Group’s Ron Quigley

On the “Backpedal”, “Reverse”, “Renege”, “U-Turn”, “About-Face”…………and the FED

The week’s biggest data point belongs to the release of today’s FOMC Minutes. Here are the major talking points:

o Several Fed officials said “forecasts overstated the pace of rate increases.”
o The FOMC minutes did not mention a “rate rise six months after the end of QE.”
o Most FOMC participants saw inflation rising to the 2% Fed goal.
o Minutes revealed “slack” persisting in the Labor market and a gradual decline in unemployment.
o A continued housing recovery was sighted..
o Several members identified trends that pose financial stability risks.

So, what’s it all mean? Great question, simple answer:

Continue reading

April Not For Fools: A Macro View

Below excerpt courtesy of Sight Beyond Sight a.m. notes from macro strategy expert Neil Azous.

Neil Azous, Principal /Rareview Macro
Neil Azous, Principal  Rareview Macro LLC


“…Just because today is the start of a new quarter for investors that does mean anyone should expect a pause or a reversal in the themes that ended the last quarter. If anything, the reset argues that real money has a new green light to continue. The key risk is that stronger US data this week actually accelerates the rebalancing.

Yesterday, we highlighted that after being down 7 of the last 9 days and having a 9-day RSI of ~22 the stock Amazon (Symbol: AMZN) needed to hold its 200-day moving average. None of that happened. AMZN closed lower again, broke the 200-DMAVG and now has an RSI of 21.

Today, the MSCI Emerging Markets (EM) Index Futures (Symbol: MESM4) are +92 bps, the EURO STOXX 50 Index (Symbol: SX5E) is +65 bps and the S&P 500 futures (Symbol: ESM4) are +24 bps. The key point here is that the Emerging Markets will likely start the quarter outperforming the Developed Markets, and Europe, both in US Dollar and local currency terms, will likely outperform the US.

Again, these are only three highlights from the many themes of last year that are now reverting and like yesterday, where Small Cap under-performance paused today, we could easily see another one-off theme pause. For example, China Internet (Tencent +4.5% last night) could be a read through for US technology to bounce. But the main point is that on aggregate the start of the second quarter should carry on from where the first quarter ended….”

Sight Beyond Sight is a subscription-based, daily macro-strategy viewpoint authored by Neil Azous and published by Rareview Macro LLC.  Subscribers include a unique assortment of leading hedge funds and Tier 1 investment managers. For additional information, please visit www.rareviewmacro.com

Macro-Strategy Synopsis: China is the Story, Not Crimea

MarketsMuse Editor Note: For those with a “macro mindset”, i.e. investment strategy with focus on global economic events and related opportunistic and/or risk reduction themes, a.m. note from Rareview Macro’s Neil Azous in the “Sight Beyond Sight” note  struck a chord, if only because Azous seems to be continuously ahead of the curve when it comes to focusing on what only becomes clear to others after the opportunity becomes a fait accompli.

“…We begin today asking two hard questions.

1.  How real is the China stimulus conversation and does the Street need to temper its short-term views on local Equities?


2.  Will Crude Oil and Gold begin to challenge the Commodity length?


Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

What this means is that no one was prepared to start 2014 with a much weaker profile in China relative to outsized gains in Commodities.


So the question now becomes: What if that profile started to reverse now and have the signals of that in the market already been sent?…”…

Another critical insight: Continue reading

Turkey Under Attack; Brazil and Mexico Targeted Next?

Courtesy of this a.m.’s edition of Neil Azous and Rareview Macro’s “Sight Beyond Sight”:

Despite bold central bank decisions over the last 48 hours, the real narrative is not what most investors walking into their offices today believe it is.

After opening up over 2%, the Turkish stock market gradually moved into negative territory, while the Turkish Lira (USD/TRY) has reversed almost the entire move lower observed following the greater than expected interest rate hike.

Neil Azous, Rareview Macro LLC
Neil Azous, Rareview Macro LLC

This is very important to recognize and highlights that there is a full blown attack now underway on the Turkish Lira.

Speculators will not be deterred by a 12% interest rate, especially as history is littered with these kinds of opportunistic events and the monthly cost of funding a short position is marginal relative to the risk-reward of making a profit of multiple percentage points in a day. Here is the next issue and what you need to know. Before dismissing this thought process you should note that this will be repeated at the upcoming Brazil and Mexico central bank meetings, despite completely different monetary policy profiles. This is a classic sign of how indiscriminate emerging markets are at the moment. ”


For more, please visit RareView Macro


No Hiding The Housing Recovery: $ITB and $XHB

Rareview Macro LogoExcerpt from Nov 22 edition of Rareview Macro’s “Sight Beyond Sight” morning commentary; courtesy of macro market trading expert Neil Azous..

At a micro level in the US, all one has to do is look at the iShares U.S. Home Construction ETF (ITB) and SPDR S&P
Homebuilders ETF (XHB) to see the new found interest in the return of the Housing recovery call come early next

The Bloomberg Chart of the Day illustrates that between Nov 15th  and January 31st the S&P 500 Homebuilding Index has come out ahead of the SP500 every year since 2005, and led last year by ~17%. The Raymond James analyst who is the source of this observation said this “…might be the most powerful and consistent seasonal trading phenomenon we’ve witnessed among any industry group.”

To continue reading the entire day’s edition of Sight Beyond Sight, please click here (subscription required, free 2-week trial, no credit card required.)