Kaegi2011

As someone suggested above, why not go for a collar (long put and short call). If you're buying close to ITM the costs generally offset. You'll have downside protection in exchange for further upside. Effectively selling without the taxes (for the duration of the options) - just know that if you do get called or need to buy back the option at higher price you need to put in more money, either to the IRS or to the counterparty, so make sure your expiry dates are appropriate.

One very high level way to rationalize it (not sure if it's the correct way...) is to think about the leverage in the system. If the economy is more levered than before, than smaller % nominal changes can lead to same if not higher equity changes. If one were to argue for this strategy, I think that would be a rather intuitive and compelling argument (for me at least).

SD - with due respect -- and I do mean it, as I've found your comments elsewhere to be generally insightful -- while I agree with you on the concept, the real world companies that I've worked for do not work this way. SC financing are **generally** not done out of a cohesive logic regarding shareholder returns or value maximization in the long run, but rather incentives at the micro level. A couple of examples that I've witnessed: 1) The CEO/COO are told they need to lower working capital by the Board b/c McKinsey did some work and shows your Shitco is 4th quartile on W/C. Reducing inventory is really hard work without taking on operational risk, and it's much easier to negotiate with suppliers for better terms. That work is further reduced when the customer asking is offering an easy out - e.g., supplier financing that's relatively cheap. For the supplier many get to receive cash faster with some financing cost, and many do take it. The treasury group does not get a say in this - they are the intermediary that facilitates the interactions with the banks, assuming they're asked to do so at all (they are on the sidelines occasionally too). 2) The company has made some promises to the street to do a stock buyback on a leverage neutral / friendly basis. TO fulfill that promise it's going to pull an easy lever - financial engineering. SC fulfills that promise, and does not show up anywhere. It's not a required disclosure (vs. something like AR securitization). Little by little W/C comes down, and analysts cheer the operational improvements that the mgmt team is achieving. 3) The company promised the rating agencies of a certain operational plan, and are told that if they continue the progress they'd be very close to an upgrade (worth 20-50bps across the entire stack when refinanced). However, the easy fruits are gone, and SC financing looks very appealing... For a treasurer whose career track would be dramatically helped with a ratings upgrade, it's a pretty good carrot. Point is - across various constituencies within a public co the SC financing option is just the easy button, and nobody needs to know about it, which is why it's so damn attractive. A few other comments: 1) Not all suppliers offer early pay discounts (currently working for a company that doesn't offer it at all - like never. We'll negotiate on the days, but no discount for paying early). The % that do this is higher than I thought. 2) This game is being played by both customers and suppliers, so unless a company is in a business that sells to consumers it's just as likely to be on the receiving end of it. 3) I'm not sure I quite get your calcs on the increase in cost of debt, but if it's 10-25bps in as total incremental cost of funding, then that's a really significant amount. It's really not trivial when companies are looking for bps in terms of funding cost improvements...

Agreed. If it's a slow drip without vol going up it's not going to hedge much of anything. I think this works b/c 1) due to the infrequency of events the market underprices the risk, and 2) the explosion of vol assumptions in the underlying instruments - both of which contribute to the convexity of the payoffs.

This is the answer. In effect it's taking off the A/R off of the balance sheet of the supplier and creates better optics for both supplier and customer. Banks/funding institutions are willing to take the risk b/c it's just another short term credit market (e.g., commercial paper) and counterparties are very credit worthy. So in effect the cost isn't really cost of funds for the supplier, it's the just a small discount to the supplier, especially in these days when rates are zero... The cost is the (discount x 365)/(term - discount period) - and it is expensive financing. The cost of (1/15, n90) is (1x365)/(90-15) - or 4.87%; the more traditional terms are (2/10, n90) is (2x365)/(90-10) - or 9.12%. The treasurer of an Apple, Amazon, etc. just borrows cheap on their credit line, pays the invoice early, and keeps the spread. SD Not exactly. The decision on paying early or not to get a discount is obviously based on the level of discount, so if the discount is hugely attractive then it may always be worth it. However, for public companies at least, the optics of higher debt balance and lower AP / WC balance is worth something (sometimes a lot more than "something"), so supply chain financing can often step in when the early pay discounts are not significant enough to outweigh that.

I know you didn't, which was the point. Just as it wouldn't be fair to make assumptions about you, it wouldn't be fair for you to make assumptions about me, especially when it's clear that you have a lack of understanding of capital markets and their connections in the background. Ever heard of cross currency swaps? Do you really think interest rates in one part of the global markets have zero impact in other parts of the world and securities pricing? But whatever, keep on calling people names - a way to really engage in a productive conversation. ::)

This is the answer. In effect it's taking off the A/R off of the balance sheet of the supplier and creates better optics for both supplier and customer. Banks/funding institutions are willing to take the risk b/c it's just another short term credit market (e.g., commercial paper) and counterparties are very credit worthy. So in effect the cost isn't really cost of funds for the supplier, it's the just a small discount to the supplier, especially in these days when rates are zero...

Vinod - appreciate the response. Gonna try to dig deeper to find someone who can explain how this all works b/c I feel like I'm really missing the forest here. :)

Is the ultimate measure of success whether they made or lost money? Because if that's the yardstick, then propping up asset values is always going to look good in hindsight. They might as well go into CLO equity as the return will look even better. I don't mean this as a sarcastic comment at all. I think there was a major line that was crossed this time around with the Fed in terms of its programs and the markets it participates in. If the intent to "preserve" asset value what's the difference b/t equity and credit? Why not just go into SPY? It seems like a major slippery slope. One that I very much dislike on a principal basis as a citizen (but my accounts are better for it...).

You're right, we would not. But if one had invested with the at the beginning, that portfolio is still likely to outperform the S&P, but then you're saying it's luck and not skill. Fair enough - not for you. Maybe we can get back to the topic of whether there are potential instruments to use for the future, or the relative merits of those. For HYG/LQD - they seem to be far less sensitive to equity movements outside of a crash scenario. Now that the Fed has effectively backstopped LQD it seems like significant near term price declines are unlikely, thus probably rendering puts on LQD as ineffective. Not sure about HYG as real distress has yet to work its way through the system, and the Fed is also soft backstopping that market as well (writing puts seem reasonably interesting tho...) So that does leave VIX as another candidate - will be looking into calls on the VIX, as well as ETN/ETPs on vol.

I don't know their performance from Feb 2010 to Feb 2020. Implicit in that question is what happens when there are no major drawdowns - I would assume it's not very favorable. But that goes into the bucket #3 that I mentioned above - which is that you don't think significant drawdowns will occur in the future and therefore insurance is not worth buying as it'll never pay off. Of course if that's your view then there's no reason to buy insurance.

So far you've simply stated your opinion, and if you want to believe that it's fine. I'm not trying to argue about your opinions. But that opinion does not hold water against actual performance in the documents shared above. So you have pretty much the following arguments: 1) You the think the numbers are inaccurate and does not reflect actual performance (again, they only take institutional money with minimum account sizes of greater than $150mm, so I don't think this is realistic, but it's possible - maybe it's another Madoff, and if you have suspicion I'd love to hear the logic...) 2) You don't think the market pricing for selling protection going forward will be as friendly going forward, and pricing of these products will go way up to reflect actual risk (certainly possible, maybe even expected, but I would have thought the same after GFC, so would be curious to hear why you think this) 3) You don't think markets will decline going forward 4) Some combination of 2/3 above Below are the relevant paragraphs where I'm wondering if you've read the letter... "A 3.33% portfolio allocation of capital to Universa’s tail hedge added 12.7% to the return of an SPX portfolio in March 2020, added 11.6% to the CAGR of an SPX portfolio since 2019, added 1.7% to the CAGR since 2015, and added 3.6% to the CAGR life-to-date (since its inception in March 2008). The Universa risk mitigated portfolio has thus outperformed the SPX across all of these timeframes, accompanied by—or, more accurately, because of—far less risk (as evidenced by the March 2020 and the 2008 columns)." And, to answer the persistent skeptics of our strategy out there, let me point out that we certainly didn’t need the Q1 2020 market drop to add risk mitigation value. At the end of 2019, for instance, Universa’s life-to-date risk mitigated portfolio CAGR exceeded the CAGRs of all of the other risk-mitigated portfolios (including, most notably, high-duration bonds), as well as of the SPX alone, by from 2.2% to 4.2%."

Have you read their research? If so, and you disagree with their figures / outcome, can you explain why? Not sure what you mean by whether I disagree with their outcome or not. If you are basing the value of an "insurance policy" on the date right after the loss, of course it'll outperform. Over time, the amount you pay for insurance is not usually a profitable investment. But you're speaking in generalities. For you to invest in their strategy you have to believe that protection pricing is improperly priced. Based on events over the past twenty years (tech bubble, GFC, and now this), we've had more than a few 20 sigma events. B/c if you believe that their 34x return is correct, a 3% allocation means they can go 11 years without making any profit to break even, and they're providing you cash at the most opportune moment (E.g., a crash) to compound. So again, is there anything specific that you disagree with?

Have you read their research? If so, and you disagree with their figures / outcome, can you explain why? Everyone has their research and everyone makes bold claims. Motley Fool beats the shit out of the market too apparently. Financial Services firm research is mostly bs. Especially stuff done only for accredited investors. I'd even point out that unless they have additional disclosures, spamming Twitter like they were doing not long ago is a major no-no in the business as well. I think since they only market to exempt participants, they can get away with it, but its definitely sketchy. I'm sorry I'm missing specifically what it is about their strategy that you disagree with? Or are you suggesting that they're just straight up lying about their performance in that very specific account letter?

Another data point: https://www.ft.com/content/9336fd0f-2bf4-4842-995d-0bcbab27d97a I'm counting ~4.5mm new accounts across RH (3mm), Schwab (600k), TD (600k), etrade (300k). Gamified’ investing leaves millennials playing with fire Slick stock-trading apps skip over the risks for inexperienced investors May 7, 2020 3:00 am by Siddarth Shrikanth When US oil prices crashed into negative territory last month for the first time in history, the financial pages were filled with warnings to retail investors looking to bet on a rebound. One trader said that it was a case of “muppets vs sharks” as amateur investors became caught up in the market carnage when they tried to call the bottom for crude prices. Such stories did not halt the millennial rush. The United States Oil Fund, the world’s largest oil exchange traded fund, reflected a worrying trend. On Robinhood, a trading app targeted at the young and tech-savvy, the number of users holding USO more than tripled over the three days that followed crude’s sub-zero plunge on April 20, reaching nearly 200,000, according to Robintrack. The flood of entrants came as the price of USO dropped about 40 per cent. ETFs in Europe and Asia experienced similarly large inflows as prices crashed. Over the next week, as hopes rose for a market rebound, Robinhood users began dumping their holdings. By May 1, holdings of USO had dropped by a third just before its price showed signs of recovery. If Robinhood’s user base, with an average age of about 30, is any guide to the actions of millennial investors, many appear to have bought low and sold much lower. Why were younger investors drawn into volatile commodity tracker funds, despite repeated warnings from regulators that these risky products were unsuitable for retail investors? At first blush, the explanation may lie in a relative lack of confidence and investment expertise, which makes those in my generation more likely to buy a fund that promises to track a benchmark. Less than half of millennials with taxable investment accounts are “extremely or very confident” in their investment decision-making abilities, according to a survey in 2018 by CFA Institute, an investment body — a share that falls to 21 per cent among millennials who do not invest. A survey in 2017 by Natixis, the French investment bank, found that 65 per cent of millennials believed that index funds were inherently less risky, despite offering “no built-in risk management”, as the bank put it. This is a recipe for disaster when it comes to commodity-linked ETFs such as USO, which behave differently to stock market ETFs. Investors counting on an eventual rebound in oil prices have been drawn to the simplicity of products that might appear to track the price of oil, overlooking the risks in the investment structure. Chief among them is the so-called rollover risk, when the ETF has to sell expiring oil contracts and buy the next month’s. With the market in “contango”, meaning that spot prices are trading below prices for future delivery, funds can be exposed to potentially unlimited losses as they roll. Such risks can be exacerbated when investors bet on leveraged products that multiply gains and losses, and often come with steep management fees. These products can catch even experienced investors off-guard. “I used to trade stocks for a living, but even I didn’t truly understand these complex commodity products,” admitted one former Goldman Sachs banker, who now invests in a personal capacity. “I took an equity ETF mentality . . . and saw my highly leveraged holdings lose 80 per cent of their value in days.” New investors have been enticed by stock trading apps such as Robinhood, E*Trade, and SoFi Invest, which offer slick user interfaces, low fees and near-instant account opening. Robinhood, the fee-free trading pioneer, added 3m users in 2020, half of whom were first-time investors, while E*Trade added 363,000 mostly retail investors in the first quarter of this year. “Robinhood has gamified investing. Trading is now so simple that it can be easy to make impulsive decisions,” one millennial investor in Harvard’s economics PhD programme told me. He regrets the progressively riskier bets he has made, which have run into thousands of dollars over the past couple of weeks. “The lockdown has also meant I’ve just had more time to spend on the app,” he added. The apps’ in-house financial newsletters, which offer simplified takes on major market events, do not provide investment advice. But they have done little to deter poor decisions. “There is so ridiculously little demand for oil right now that we could theoretically be getting paid to fill up our own tanks,” gushed Robinhood’s Snacks newsletter on April 21, providing little information on the nature and dangers of ETFs that its army of bargain-hunting millennials were piling into that day. Such warnings remained buried in the fine print at the bottom of Robinhood’s website. For all the excitement around oil, it remains far from certain that the only way is up for the industry. Investors are beginning to questionwhether oil demand will ever recover to pre-crisis levels as the climate challenge continues to rise up the agenda. For a generation that supposedly factors in social and environmental impact into financial decision-making, placing long-term bets on renewable energy might make more sense for their wallets and consciences. Just be careful what you track. The author, a former journalist at the Financial Times, is studying for a joint MPP/MBA degree at Harvard’s Kennedy School and Stanford’s Graduate School of Business