Casgains Academy: Billionaires are Crashing the Stock Market, the Ultimate Hedge


Casgains Academy
Jan 27, 2022

The wealth gap has been expanding for decades for one reason. Billionaires are experts at capital preservation and growing wealth.

That being said, public SEC disclosures allow retail investors like you and me to see exactly how billionaires are building their wealth. The vast majority of top-tier fund managers and billionaires have recently been hedging their net worth against a US stock market crash.

That is what this video will focus on.

Most investors assume that hedge funds are terrible at managing money because the average fund manager underperforms the S&P 500. However, further context is necessary before one can make such a conclusion.

The majority of hedge funds are not interested in beating the S&P, because they are simply focused on one goal: steady capital growth.

This graph compares the performance of the average hedge fund and the S&P 500 from 1994 to 2017. What you’ll notice is that hedge funds are much less volatile in comparison to the S&P. The S&P 500 outperformed hedge funds during the dot-com bubble by a large margin, but when the dot-com bubble popped, the S&P collapsed while hedge funds barely even moved.

A similar situation happened during the 2008 recession. The average hedge fund crashed by roughly 22%, while the S&P crashed by over 50%.

The reason why this always happens is because fund managers are focused on alpha. Alpha is a statistic that tracks a fund’s risk adjusted return. Making large sums of money during a bull run is fantastic, but that doesn’t mean anything if your gains disappear within a matter of months.

Billionaires have recently begun hedging their portfolios against future market weakness. It’s no secret that valuations are at all time highs, inflation is rampant, and the Federal Reserve is set on raising interest rates and slowing quantitative easing, which is when the Fed purchases bonds. Interest rates are directly correlated with market valuations, and a rise in interest rates could easily crash the market.

Elon Musk, Cathie Wood, Ray Dalio, Michael Burry, Bill Ackman, Charlie Munger, Warren Buffett, and Chamath Palihapitiya have all been hedging against a market recession.

The key to market hedging ultimately comes down to position sizing. Timing the market is notoriously difficult and you should never bet a significant portion of your portfolio on a market crash.

 Instead of going all in on short dated options or shorting the market, you should allocate a small portion of your portfolio as a hedge against your long portfolio. In the event that a market crash occurs, you can sell that hedged position to purchase stocks for long term gains.

Bill Ackman, a hedge fund manager that manages over $13 billion, recently initiated a small short position on the bond market. This position is only worth roughly 1 to 2 percent of his total portfolio, but in the event that bonds crash, it could rise to become 10 or even 20 percent of his portfolio.

Bond yields are currently at 1.8%, which is much lower than inflation. These yields could easily increase to 4 or even 5% if inflation gets out of control. On the flip side, bond yields will never go below 0% because investors can hold cash for 0% returns.

This is asymmetric risk, because those that are shorting the bond market are taking on low risk while having high potential reward. Ackman recently explained how he believes the Federal Reserve is understating their retraction plan. He said, “While it has become conventional wisdom that the Federal Reserve will raise rates 3 to 4 times this year to mitigate inflation, the market expects 25 basis point increments.

The unresolved elephant in the room is the loss of the Fed’s perceived credibility as an inflation fighter and whether 3 to 4 would therefore be enough.

The Federal Reserve could work to restore its credibility with an initial 50 basis point surprise move to shock and awe the market, which would demonstrate its resolve on inflation.” Bill Ackman is essentially pressuring the Fed to raise interest rates at the sake of the economy.

Ackman is known for manipulating the market and could be doing so again with this tweet to make his short position increase in value.


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