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 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 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, Mylan NV , Himax Technologies Inc, and Apple Inc .
The $2.9 billion Fidelity Select Defense and Aerospace Portfolio, meanwhile, fell 5.1 percent on Monday, dragged lower by declines in Boeing Co, Northrop Grumman Corp and General Dynamics Corp.
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 gleaned a $314 million profit yesterday, the largest among all single stock positions tracked by data firm S3 Partners.
Traders shorting Nvidia Corp, Netflix Inc, and Amazon.com Inc 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, 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, 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."
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