Many events are affecting the market right now, and it’s not always clear how one should be positioned to take advantage of potential opportunities. In a rare appearance at the Invest for Kids conference late last week, Jon Pollock of Elliott Management spoke with David Richter of GCM Grosvenor about a variety of topics, including COVID-19, the election and positioning.
Q3 2020 hedge fund letters, conferences and more
“Slow-motion crisis”
Richter asked Pollock about how Elliott Management has been hedged during the COVID-19 pandemic. He noted that the fund has been doing quite well despite the pandemic.
Jon Pollock described the pandemic as “a bit of a slow-motion crisis.” He noted that people saw the news about the coronavirus coming out of China starting in mid-January, and at Elliott, they expected things to get pretty bad. Pollock said it became clear that asymptomatic patients could spread the virus, and anyone who has seen 12 Monkeys knows how efficient the global airline business is at “distributing disease.”
In early February, Elliott started to prepare as the market reached new highs. Pollock said they were stunned about the market’s new highs and that the impact of the virus hadn’t dawned on people yet. He said Elliott used that time to build certain positions, adding that they had a “substantial position in the front end of the U.S. curve.”
Jon Pollock: Here’s what paid off for Elliott early in the crisis
Elliott had some swaptions, which Pollock said would benefit to the extent that the markets “did end up waking up” to the pandemic. The swaptions provided a buffer for the things the fund had in its book that did underperform. Pollock said they also had a “substantial position” in gold and fixed strike options in major indices, which also paid off.
He said it was natural for Elliott to come out of that positioning, and volatility “ripens pretty dramatically.” Pollock said with the nature of fixed strikes, Elliott got the double benefit of volatility expanding and deltas moving in their direction, so they unwound quite a bit of those positions. The fund also traded around its gold position.
“I’d have to say, you know, we didn’t get it all right,” Pollock said. “I mean, I wasn’t gratuitously onboarding risk in the March period. I mean, my big mistake, I think, over the period was, was not realizing exactly what the Fed, Treasury and the fiscal stimulus would do to stabilize the financial markets and how quickly they recovered. But we were very fortunate to liquidate a bunch of the hedges, you know, at or near the lows, but I just want to make it clear, we weren’t, you know, onboarding, you know, risk, you know, hand over fist.”
Pollock noted that there was a time when senior credit “was quite interesting,” but it was a “very compressed timeframe. Six months later, the volatile markets never really normalized, which has made hedging very expensive.
Jon Pollock predicts a “blue wave” and no contested election
One of the big concerns in the market is whether there will be a clear winner in the presidential election, but Pollock expects there will be. He noted that it’s difficult to understate how important the election is and that it’s important to have the “blue wave,” or a Democratic president, Senate and House of Representatives.
He believes the markets have rallied after the presidential debate because investors think there will be a decisive winner and loser in the election. Pollock noted that there was a lot of talk about disruption in the market from “weeks and weeks” of turmoil and litigation in determining who the next president would be.
He believes the market is looking forward to an expected blue wave and a significant amount of stimulus — $3.5 trillion. Pollack expects any impacts from disruptions on the tax side will be offset and added that it’s unclear when the tax changes will occur.
What could happen in the event of a blue wave?
If the Democrats take the presidency, House and Senate, he expects the U.S. dollar to weaken, the economy to grow and some lift in the long end of the curve, which means interest rates could start to go up.
“I don’t think that that’s, you know, an absolute negative for equities, per se, because there’s a lot going on there,” Pollock said. “But I think you could do a bunch of different things. I think a weaker dollar has traditionally been good for, for EM and foreign markets, relative to the U.S., and you know, U.S. has outperformed kind of everything on the planet. And so some of those macros might start to shift in favor of, you know, European markets, or EM, and I think you’ll see, you know, commodity prices do better in this environment as well.”
Pollock also expects a drag from taxes on tech companies as government limits are established on them. He noted that with the stimulus, it hasn’t just been the six big tech names that have been outperforming. He believes there could be a rotation in equities away from tech.
This article first appeared on ValueWalk Premium.
