The London investment fund nicknamed "50 cent" for purchasing cheap protection against sharp falls in stock prices made roughly US$2.6bn on a series of trades in March, offsetting losses stemming from the global sell-off sparked by coronavirus.
The outbreak of Covid-19 ripped through global financial markets last month, sending the S&P 500 index down more than 30 per cent at its nadir and pushing the Vix volatility index — also known as Wall Street's "fear gauge" — higher than levels seen during the 2008-09 financial crisis.
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Westminster-based Ruffer, which has about US$23bn under management, said it made more than US$800m from a US$22m purchase of derivatives contracts that track the Vix and profit if it rises, which typically happens as stock prices fall sharply.
A further US$1.8bn gain came from other equity, gold and credit derivatives that insulated against the manager's losses. Overall, Ruffer's flagship Total Return fund was down 0.8 per cent at the end of the first quarter.
The Financial Times has previously reported that Ruffer was the mystery fund that profited from a similar volatility trade during a milder bout of turmoil in February 2018, buying up Vix derivatives contracts costing half a dollar each and earning itself the nickname "50 cent", after the US rapper famous for the album Get Rich Or Die Tryin'.
Following that episode, the fund's Vix trader Anthony Cooper made a wooden sign with the word "Bearsville" inscribed on it and hung it on chief investment officer Henry Maxey's door. Maxey said he remained bearish, even after the recent sell-off, predicting a wave of corporate failures as large debt piles become unmanageable with the global economy in lockdown.
"I think the US is going to see a massive default cycle," he told the FT. "It's too big of a shock to cushion. You cannot just put the whole economy on a cryogenic freeze."
The fund made roughly US$350m from a purchase of US$18m of put options on the S&P 500 and Euro Stoxx indices, which gave Ruffer the right to sell at a fixed price, even after the sell-off accelerated. It also guarded against gold faltering in its role as a haven asset, pocketing about US$145m.
A further US$1.3bn came from buying credit derivatives that protected against a dramatic decline in corporate bond prices. The trade bore similarities to one made by Bill Ackman, whose Pershing Square fund countered losses in its own equity portfolio with a US$2.6bn profit on credit default swaps.
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Maxey said the fund's strategy of guarding against volatility using Vix derivatives had now become too expensive, as the index remains elevated.
Instead, he is turning his attention to expectations of rising inflation and a weaker dollar, in part stemming from the onslaught of stimulus provided by the Federal Reserve's intervention in financial markets and fiscal support from the US Government. Maxey has already begun buying inflation-protected Treasuries and believes the Japanese yen may also provide a hedge against further turmoil should the dollar weaken.
"I won't say I'll never use Vix again but I don't think I will for some time. This was a regime-change moment," he said. "The essence of this was protection. We have performed in a lacklustre way for years and part of the reason for that is because we were worried about a sell-off like this."
Written by: Joe Rennison in London
© Financial Times