How did this fund lose so much money from losing money buying puts during Covid crash?

H

helpme_please

Apologies if this sound like newbie question.

This fund bought put options which should make them a lot of money when the market crashed during the peak of the Covid virus season. Yet, the fund lost so much that it has to be liquidated.

How can selling off too rapidly cause put option strategy to lose money instead of make money? What went wrong with their risk management hedging strategy using put options? Would selling futures be a better option?

https://www.wsj.com/articles/allian...wo-hedge-funds-11585324646?mod=article_inline

Allianz Global Investors is liquidating two hedge funds after they took heavy losses in recent weeks on stock-options trades.

An Allianz Global Investors spokesman said the two funds, Structured Alpha 1000 and Structured Alpha 1000 Plus, had been net buyers of puts, or options giving the holder the right to sell an asset at a predetermined price in the future. The puts were designed to hedge against losses the funds might endure from other positions should the market decline.

They didn’t work, in large part because the market sold off more rapidly this month than it had during past downturns, including the 2008 financial crisis, a person familiar with the funds said.

This pace “had a particularly large impact on the options positions held by Structured Alpha funds, particularly the two highest target alpha private strategies,” the spokesman said in an email.
 
They must have paid too much premium for the put options (Since implied volatility was going up like crazy in March 2020), so option premiums (especially Puts) were through the roof.

On top of that, if they bought expensive OTM puts at exactly the bottom of March 2020, then their puts never went in-the-money, which means they expired worthless, i.e. a 100% loss of their investment in those puts.
 
helpme_please said:
Apologies if this sound like newbie question.

This fund bought put options which should make them a lot of money when the market crashed during the peak of the Covid virus season. Yet, the fund lost so much that it has to be liquidated.

How can selling off too rapidly cause put option strategy to lose money instead of make money? What went wrong with their risk management hedging strategy using put options? Would selling futures be a better option?

https://www.wsj.com/articles/allian...wo-hedge-funds-11585324646?mod=article_inline

Allianz Global Investors is liquidating two hedge funds after they took heavy losses in recent weeks on stock-options trades.

An Allianz Global Investors spokesman said the two funds, Structured Alpha 1000 and Structured Alpha 1000 Plus, had been net buyers of puts, or options giving the holder the right to sell an asset at a predetermined price in the future. The puts were designed to hedge against losses the funds might endure from other positions should the market decline.

They didn’t work, in large part because the market sold off more rapidly this month than it had during past downturns, including the 2008 financial crisis, a person familiar with the funds said.

This pace “had a particularly large impact on the options positions held by Structured Alpha funds, particularly the two highest target alpha private strategies,” the spokesman said in an email.
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because they were actually short vol. the net buyer of puts is a red herring.

you can be short 1 SPX 10000 strike put expiring a year from now and long 2 1 strike puts expiring tomorrow. You are net long puts but will still get clobbered in a sell off.
 
helpme_please said:
Apologies if this sound like newbie question.

This fund bought put options which should make them a lot of money when the market crashed during the peak of the Covid virus season. Yet, the fund lost so much that it has to be liquidated.

How can selling off too rapidly cause put option strategy to lose money instead of make money? What went wrong with their risk management hedging strategy using put options? Would selling futures be a better option?

https://www.wsj.com/articles/allian...wo-hedge-funds-11585324646?mod=article_inline

Allianz Global Investors is liquidating two hedge funds after they took heavy losses in recent weeks on stock-options trades.

An Allianz Global Investors spokesman said the two funds, Structured Alpha 1000 and Structured Alpha 1000 Plus, had been net buyers of puts, or options giving the holder the right to sell an asset at a predetermined price in the future. The puts were designed to hedge against losses the funds might endure from other positions should the market decline.

They didn’t work, in large part because the market sold off more rapidly this month than it had during past downturns, including the 2008 financial crisis, a person familiar with the funds said.

This pace “had a particularly large impact on the options positions held by Structured Alpha funds, particularly the two highest target alpha private strategies,” the spokesman said in an email.
More...

Would be nice if we can read the whole article. Yup still too cheap to pay to read those damn articles.

My take, wasn't delta-neutral enough, either they didn't buy enough puts or the puts weren't the perfect hedge to their portfolio or both. Notice they were NET buyers of puts so that means they might have bought calls or sold puts as well it's just that they bought more puts than calls or short puts so they are dealing with a net delta. And in this case, they needed to make sure that the net delta matches that of their portfolio and my suspicion, the net delta on the net long put position was too low; it wasn't enough. If they had just bought puts to be delta-neutral for their portfolio, the rapid descent of the underlying would've allowed the gamma and the vega of the long puts to kick in regardless at which premiums they bought them at because the market sold off more than last month and that would've allowed them to cushion enough of the losses of the underlying. But because they also bought calls or sold off puts so the losses on the calls or on the short puts must've added more onto the losses incurred on their portfolio and they were just too overwhelming for the long puts to offset so KO.

Or the long puts weren't the perfect hedge to their underlying in the portfolios so they weren't moving fast enough to offset the losses on the underlying and plus the losses on the long calls or short puts, the long puts just weren't effective enough.

If it's both then yeah that's how they got screwed. Hedging with options with the right delta ratio is very important, too low you don't get enough hedging and too high, it cuts into your profit. Very tricky stuff.
 
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traider said:
Fund is probably short the front and long the back. The front moved up too much and they had to liquidate at the worst possible time. Short front and long back works most of the time and it looks like you have alpha when you don't
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That's dumb. Why would they short the front when the whole point of buying the puts was to hedge?
 
Last edited:
JSOP said:
My take, wasn't delta-neutral enough, either they didn't buy enough puts or the puts weren't the perfect hedge to their portfolio or both....
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Yeah that'd be my guess too. They were most likely heavily short vega, but net long options to give this appearance of safety. If they bought units too far OTM, then they probably didn't do much as most of the move ended up going through all their most-negative gamma region.
 
There were several articles about this last year, including here on ET.
They held puts and were buying more but are sued by their clients for not buying enough puts to offset the risk.
 
guru said:
There were several articles about this last year, including here on ET.
They held puts and were buying more but are sued by their clients for not buying enough puts to offset the risk.
More...

So we are not the only ones who see that the mismatched delta was the problem.
 
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