Analysis: What were the chances? U.S. stock selloff sinks Probabilities Fund among others

Himax Technologies

06/02/2018 23:35

By David Randall 
    NEW YORK, Feb 6 (Reuters) - The Probabilities Fund was 
supposed to take some of the risk out of the stock market.  
    The $81.2 million mutual fund, backed by an eponymous firm 
based in San Diego, aims to have a double leveraged position in 
the U.S. stock market during periods when there is a high 
likelihood of further gains, and a portfolio all in cash during 
times it sees a high chance of losses.  
    Yet the Probabilities fund, once a hedge fund before 
converting itself into a plain-vanilla mutual fund in 2013, 
found itself wrong-footed on Monday, entering the day with 
positions in exchange-traded funds that returned double the gain 
or loss of the U.S. benchmark S&P 500 stock index.  
    During the 4 percent decline in the S&P 500 index, on a day 
when the Dow Jones Industrial Average fell more than 1,000 
points, the Probabilities Fund  PROCX.O  dropped 8.2 percent, 
the largest decline among any actively managed U.S. stock fund 
tracked by Lipper.  
    "We are currently in the bullish phase of our trading 
strategy and yesterday's return reflected a leveraged position," 
Jonathan Chatfield, the fund's chief portfolio manager, told 
Reuters. 
    "We exited the leveraged position and were one times long at 
the market open this morning. The positive impact of yesterday's 
trades should be reflected in an improvement in Tuesday's 
closing" price, he added. 
    On its website, the Probabilities Fund Management LLC says 
that the Probabilities fund's strategy between the start of 2008 
and the end of 2017 has resulted in a nearly 188 percent gain, 
compared with a 126 percent gain in the broad S&P 500 index. 
    The largest one-day decline in U.S. stocks in more than six 
years punished fund managers large and small on Monday, leaving 
just one actively managed large-capitalization stock fund 
positive for the day.  
    Those that suffered the steepest declines were those that 
used leverage, made concentrated bets in only a few stocks, or 
focused on thin slices of the market, all strategies that were 
richly rewarded during the 19 percent rally in the S&P 500 that 
left the index starting the year with record highs.  
    Instead, fund managers are starting to feel the first cracks 
in the nine-year long bull market as interest rates rise and the 
era of cheap money appears over.  
    The $16.2 million Upright Growth  UPUPX.O  fund, for 
instance, dropped 7.1 percent on Monday alone, stung by steep 
loses in the four companies that make up 80 percent of its 
assets: Teva Pharmaceutical Industries Ltd  TEVA.TA , Mylan NV 
 MYL.O , Himax Technologies Inc  HIMX.O , and Apple Inc 
 AAPL.O .  
    The $2.9 billion Fidelity Select Defense and Aerospace 
Portfolio  FSDAX.O , meanwhile, fell 5.1 percent on Monday, 
dragged lower by declines in Boeing Co  BA.N , Northrop Grumman 
Corp  NOC.N  and General Dynamics Corp  GD.N .   
    Both firms declined to comment for this story. 
         
    SHORT-SELLERS RIDING SELLOFF  
    Left behind during the meteoric rise in the S&P 500 and Dow 
last year, short-sellers,  who make money by wagering that a 
company's share price will fall, finally pocketed some profits 
during Monday's downdraft. 
    Collectively, traders with short positions in electric car 
maker Tesla Inc  TSLA.O  gleaned a $314 million profit 
yesterday, the largest among all single stock positions tracked 
by data firm S3 Partners.  
    Traders shorting Nvidia Corp  NVDA.O , Netflix Inc  NFLX.O , 
and Amazon.com Inc  AMZN.O  each reaped gains of $248 million or 
more, according to S3 Partners data. 
    Noted short-seller Jim Chanos of Kynikos Associates, who 
continued to add to his short position in Tesla throughout 2017, 
told Reuters on Monday: "Markets sometimes go down, too." 
    The drop in Tesla likely also benefited managers like David 
Einhorn whose Greenlight Capital has been betting against Tesla, 
Caterpillar Inc  CAT.N , Amazon and Netflix, a group he calls 
the "bubble basket."   
    Greenlight returned only 1.6 percent last year and lost 6.0 
percent in January as these stocks roared higher. A spokesman 
for Greenlight declined to comment. 
    For a number of hedge funds, bets on technology stocks have 
paid off in the last few months. For example, Chase Coleman's 
Tiger Global Management gained 28 percent in 2017 and posted a 
9.9 percent gain in January. A spokeswoman declined to comment. 
    Funds that take both long and short positions also buffered 
the stock-market blow with their short bets on Monday. For 
example, the $5.9 billion AQR Long-Short Equity fund  QLEIX.O , 
a mutual fund which employs a hedge-fund like strategy, fell 2.5 
percent yesterday, or about half of the decline of the broad 
market. 
    Overall, the lone actively managed large-capitalization 
stock fund that posted a gain Monday was the $115 million Arin 
Large Cap Theta fund, which blends a long-equity portfolio with 
a buy and write option strategy that allows it to collect extra 
income while limiting its swings up or down.  
    The fund, which gained 0.68 percent yesterday, is up 4.5 
percent over the last year, trailing the S&P 500 by 
approximately 10 percentage points. 
    "We have been stuck in the mud, working very hard and 
producing very little, and then you have days like yesterday 
where the market sells off and we're able to stay out of harm's 
way," said Joseph DeSipio, the chief market strategist at 
suburban-Philadelphia based Arin Risk Advisors. "This may be the 
thing that convinces people to stick to more traditional ways of 
investing and buy and hold great companies." 
 
 (Additional reporting by Svea Herbst-Bayliss and Lawrence 
Delevingne; Editing by Jennifer Ablan and Clive McKeef) 
 ((David.Randall@thomsonreuters.com; 646-223-6607; Reuters 
Messaging: david.randall.thomsonreuters.com@reuters.net)) 
 
Keywords: USA STOCKS/WINNERSANDLOSERS