Thank you for sharing the week-by-week performance data of the fund. I took some time to analyze the reported weekly gains and losses. When calculated using compound interest, the overall return for this time period appears to be approximately +4.89%.
Could you please elaborate on how the +15% return was calculated? I'm interested in understanding the methodology behind this figure.
Hi Igor, sure. The positioning comes down not to regular longs or shorts - I assume this is how you've calculated the returns - but to returns from options positions. We mentioned in our July and June posts which OTM put options we were looking at (about 10% to 15% out-of-money, back then being as cheap as $2 to $3, both regular puts and put spreads where you buy a lower delta put and sell a higher delta put). The entire positioning was based on 3:1 returns of the hedges if a 200 point drop in SPX happens before September. It happened even earlier, so the returns were even larger, so they more than offset the losses from the long positions.
This was therefore not a pure short, by no means. It was a hedge against long positions, designed so as to deliver a significant benefit if markets drop sharply. If they hadn't, if they just traded sideways for the entire month, the position would have delivered a small loss over the entire period. That was the risk.
Hello,
Thank you for sharing the week-by-week performance data of the fund. I took some time to analyze the reported weekly gains and losses. When calculated using compound interest, the overall return for this time period appears to be approximately +4.89%.
Could you please elaborate on how the +15% return was calculated? I'm interested in understanding the methodology behind this figure.
Best regards,
Igor
Hi Igor, sure. The positioning comes down not to regular longs or shorts - I assume this is how you've calculated the returns - but to returns from options positions. We mentioned in our July and June posts which OTM put options we were looking at (about 10% to 15% out-of-money, back then being as cheap as $2 to $3, both regular puts and put spreads where you buy a lower delta put and sell a higher delta put). The entire positioning was based on 3:1 returns of the hedges if a 200 point drop in SPX happens before September. It happened even earlier, so the returns were even larger, so they more than offset the losses from the long positions.
This was therefore not a pure short, by no means. It was a hedge against long positions, designed so as to deliver a significant benefit if markets drop sharply. If they hadn't, if they just traded sideways for the entire month, the position would have delivered a small loss over the entire period. That was the risk.