The game of “pick the market implosion” date is something that has taken on almost a drinking game type of mythology. Certain investment managers know the calculus of Federal Reserve stimulus, the US status as the world reserve currency of choice, US debt and unfunded liabilities being inappropriately accounted for, and the ultimate implosion of the big bank derivatives that underlie the world economic system.
This has all led to market insiders recognizing the unreported reality and hedging accordingly. No one can accurately predict the exact implosion date. Guesses among investing professionals typically have a ten year spread, with some hedge fund modeling predicting a period of enhanced volatility leading up to a very large and significant crash.
Hedge fund investors, true to their name, have been preparing for such an event to varying degrees.
George Soros hedging against a downside stock market correction
According to his latest regulatory disclosures, legendary hedge fund managers George Soros has an $1.3 billion in notional exposure to hedge against a downside stock market correction, a report in Zerohedge noted.
Right now Soros, with a reputation as being internationally connected, might also be factoring in another point in the calculation: global military moves.
Although traditional free market indicators of major issues on the horizon – the stock and gold markets – appear to be muted to incursions in Europe, speculation is much more risk exists in this market than is being told to the general public. Soros has himself been a crisis bug of sorts, as reported in ValueWalk, so it should come as no surprise he is hedging his risk.
George Soros’ Put exposure in SPY
This in part could explain Soros’ near $2.2 billion SPDR S&P 500 ETF Trust (NYSEARCA:SPY) Put exposure, designed to protect against a significant drop in the market. The single position represents a whopping 17 percent allocation in his portfolio.
Other hedge fund luminaries, such as Carl Icahn and Paul Singer, have publicly warned about the dangers of the big bank derivatives exposure. Icahn, who had an incredible second quarter of 2014, generated such returns with less than half his portfolio long equities – a stunning admission.
The ZeroHedge article ends by speculating on recent warnings from Janet Yellen regarding a bubble, which has echoed concerns of major hedge fund managers.
Of course we’re in a bubble, as Carl Icahn has noted. The absurdly mis-pricing of risk in the bond and stock market reflects this. The issue is: how do investors protect themselves without giving up too much upside? In the second quarter of 2014, Icahn found the solution. Let’s watch his returns if the market tanks – then, if his mastery of risk plays itself out, he can be crowned along with other hedge fund risk masters.