Titan Capital Joins Black Swan's Taleb in Raising Bets on Crash
Author Nassim Nicholas Taleb
Daniel Acker/Bloomberg
Nassim Nicholas Taleb, seen here, whose book “The Black Swan” is about how unforeseen events can roil markets, said Aug. 11 he is “betting on the collapse of government bonds” and that investors should avoid stocks.
Nassim Nicholas Taleb, seen here, whose book “The Black Swan” is about how unforeseen events can roil markets, said Aug. 11 he is “betting on the collapse of government bonds” and that investors should avoid stocks. Photographer: Daniel Acker/Bloomberg
Titan Capital Group LLC, whose flagship volatility fund rose 21.6 percent as stocks tumbled in May, has raised bets on extreme market moves because investors’ views on the economic outlook have polarized.
The New York-based hedge fund, which manages about $400 million, has added “a lot more” cheap, out-of-the-money options, betting the market is underestimating the likelihood of a crash, founder Russell Abrams said in a phone interview. Treasuries, German government bonds and Japan’s yen are pricing in economic outcomes that are bleaker than the stock market expects, said the former co-head of U.S. equity derivative trading and convertible arbitrage at Merrill Lynch & Co.
“They are pointing to a much more dangerous environment than what equity investors believe,” he said in an interview Aug. 27. “Either you’re going to see the bond market make the the big move or the equity market make the big move; the current situation is not in equilibrium.”
Nassim Nicholas Taleb, whose book “The Black Swan” is about how unforeseen events can roil markets, said Aug. 11 he is “betting on the collapse of government bonds” and that investors should avoid stocks. Government bonds around the world have rallied on growing signs the global economic recovery is faltering, driving yields on two-year Treasury notes as well as German 30-year and 10-year bonds to record lows last week.
The yen reached a 15-year high of 83.60 per dollar Aug. 24. The Standard & Poor’s 500 Index gained 9.4 percent from July 1 until Aug. 10, when the Federal Reserve said that growth probably will be “more modest.”
‘Greater Risks’
“When you have assets so highly correlated, that makes the risks far, far greater,” said Abrams, who worked with the late Fischer Black researching derivative strategies at Goldman Sachs Group Inc. from 1992 to 1993. Black and Myron Scholes developed the Black-Scholes model of pricing options.
Out-of-the-money options are puts and calls whose strike price is either lower or higher than the market price of the underlying security. An agreement to sell is a put option; an agreement to buy is a call option.
Funds such as Titan Capital tend to outperform when markets are falling because they trade on volatility, which increases when prices decline. Volatility, as measured by the Chicago Board Options Exchange Volatility Index, was at a 14-month high in late May as the sovereign debt crisis swept through Europe.
The Titan Global Return Fund gained 21.6 percent in May, according to a letter to investors. Hedge funds globally lost 2.7 percent during the stock market rout that month, their worst monthly drop since October 2008, according to Eurekahedge Pte. The fund gained 13.2 percent in the first six months of the year, according to the investor letter.
‘Black Swan’
The Chicago Board Options Exchange Volatility Index rose as high as 45.79 on May 20 as the S&P 500 lost 8.4 percent. The VIX, a measure of investor expectations for stock swings known as implied volatility, decreased to 27.37 Aug. 26.
The financial system is riskier than it was before the 2008 crisis that led the U.S. economy to the worst contraction since the Great Depression, said Taleb, a professor at New York University who advises Santa Monica, California-based Universa Investments LP, a fund that bets on extreme market moves.
Any relapse in the U.S. economy would be “far worse” than the previous recession, Abrams said.
“The risk is that the government can’t keep spending money to keep the economy afloat,” he said. “The government’s thrown everything and if they fail, the confidence will plunge much faster.”
Debt Woes
U.S. President Barack Obama’s American Recovery and Reinvestment Act spent $814 billion trying to spur growth. The U.S. government’s total outstanding debt is $13.4 trillion, according to Treasury figures.
As investors tend to become more risk averse later in the year, “any market downturn might lead to much higher volatility,” Abrams said.
Titan Capital, which managed almost $1 billion at the end of 2008 before the global financial crisis led to investor withdrawals, has opened an office in Hong Kong. Kyle Chuang, portfolio manager for Titan Asia Volatility Fund, relocated to Hong Kong from New York. Abrams founded Titan Capital in 2001.
The fund is set to trade more Chinese securities as the nation “becomes a more mature market,” Abrams said. It currently trades Chinese securities that are listed overseas.
The nation is on the cusp of a “big bang” of reforms that will give foreign investors greater access to capital markets, Nomura Holdings Inc. analysts led by Hong Kong-based Sean Darby wrote in a report Aug. 18.
The global fund allocates between 10 percent and 25 percent of its money to Asia and the remainder to the U.S., Abrams said.
To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net
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