tag:blogger.com,1999:blog-5389144729834496735.post7991340154147575826..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: Einhorn's Macro TradesUnknownnoreply@blogger.comBlogger15125tag:blogger.com,1999:blog-5389144729834496735.post-85307500767603859302012-06-22T02:29:45.356-04:002012-06-22T02:29:45.356-04:00For retail investors under Reg T, you can open a p...For retail investors under Reg T, you can open a position with 50% equity.<br /><br />However, as ShortBus points out, Interactive Brokers (and many others) offer portfolio margin as an alternative to Reg T (assuming you meet the requirements). Typical equity longs are 15% then.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-8307914186322180422012-05-28T23:05:28.312-04:002012-05-28T23:05:28.312-04:00Thanks for the clarification. It hasn't chang...Thanks for the clarification. It hasn't changed much over the years... with rates at zero, it's hard to realize what a difference these things can make (funding long/shorts etc...).kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-79207143626773924302012-05-28T20:27:09.003-04:002012-05-28T20:27:09.003-04:00kk, you are absolutely right. Prime brokers fund t...kk, you are absolutely right. Prime brokers fund themselves at libor (now 0.25) and let at about 30 bps spread. In absolute terms that is not much more than 1% but when rates rise the difference is huge. Also, as kk said, with primes, the cash proceeds from shorts is not restricted, for retails investors it is. So even IF interactive brokers gave you margin at libor +30, your shorts are still twice as expensive because of the restricted cash. Finally, interactive brokers will margin longs at about 50% for most stocks (looked at individually). A prime will apply a portfolio approach and if you have a diverse portfolio with offsetting positions you can easy obtain 80-90% funding from the prime. None of those things are available to retail and the difference is huge, although not in absolute terms with these very low interest rates.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-89863372957635578512012-05-25T07:06:02.177-04:002012-05-25T07:06:02.177-04:00Oops, and forgot to mention the other big one; pri...Oops, and forgot to mention the other big one; prime broker customers can do swaps and other OTC derivatives transactions (non-exchange traded derivatives). Individuals typically can't. That's a big difference. Hedge funds use all sorts of derivatives like total return swaps and even asset swaps to lever convertible arbitrage trades etc... Retail can't do that.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-74978683070540036742012-05-25T06:57:18.094-04:002012-05-25T06:57:18.094-04:00I'm not sure of the exact details, but there i...I'm not sure of the exact details, but there is a big difference. Maybe the prime broker here can answer this better. <br /><br />The first difference would be that at Interactive Brokers, retail investors would need to put up 50% margin for stocks. Prime brokerage accounts are much lower. For futures, I don't know if cross margining in retail accounts are allowed; maybe there is a system to do that now. But before, you had to have margin posted separately for each exchange. <br /><br />Prime brokerage clients are not limited to futures exchanges. They can put on spot FX, bonds, treasuries positions at low rates and low margin; retail investors can't. <br /><br />I don't know if this is still true, but I think most retail investors do not get paid on the cash balance on short sales; prime brokerage customers do. <br /><br />As for rates, for a highly liquid securities long/short, the rates offered used to be typically +20 bps / -20 bps, so that's pretty cheap. Much cheaper than 1% now, which is almost Fed Funds + 75/100 bps. <br /><br />Anyway, there are a lot of differences here.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-78596119545967145582012-05-25T04:06:24.855-04:002012-05-25T04:06:24.855-04:00Interactive Brokers offers a portfolio margin acco...Interactive Brokers offers a portfolio margin account, which allows borrowing costs of about only 1%, so I am not sure why you are saying retail investors could not do the same thing. I think prime brokers would not be offering much better rates than Interactive Brokers.<br /><br />http://individuals.interactivebrokers.com/en/general/education/comparebrokers.phpSBTradeshttps://www.blogger.com/profile/05733253279331854250noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-17615706815328327592012-05-25T04:01:24.711-04:002012-05-25T04:01:24.711-04:00I believe that anyone could get a portfolio margin...I believe that anyone could get a portfolio margin account and make these trades in the same way. holding stocks which are used as collateral against leveraged futures bets. There are retail brokerages which support portfolio margin in this way.SBTradeshttps://www.blogger.com/profile/05733253279331854250noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-85719394467332293502012-05-24T23:14:51.375-04:002012-05-24T23:14:51.375-04:00Good point. Great to hear from someone in the tre...Good point. Great to hear from someone in the trenches and knows what's going on. Yes, free is not a great word to use. <br /><br />On the other hand, the reality, usually, is that people like Greenlight typically wouldn't want to lever up as much as he would be allowed to in a prime brokerage account. <br /><br />For example, if he needed only to put up 20% on a long/short, I don't think he'd ever lever up 5x. Most long/short hedge funds go 140% long, 80% short or some such thing. <br /><br />And my point is that even if you do 140/80 or something, you probably have plenty of room to put on OTC derivatives and fixed income positions against that portfolio. <br /><br />You would know exactly how much of what can be done... <br /><br />Anyway, good point. Not free, but compared to the retail guy, it's almost free...kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-8098209984838137932012-05-24T22:49:02.104-04:002012-05-24T22:49:02.104-04:00I don't think your statement that the macro tr...I don't think your statement that the macro trades are "free" is entirely correct. While it is true Greenlight can make use of the long/short portfolio to pledge it for cash from the prime broker in order to pay derivative margins ect, there is definitely an opportunity cost there. Instead of the hedges, Greenlight could use that same long/short portfolio to obtain leverage to buy additional stock positions. and THAT lost opportunity is the cost of the hedges, definitely not free. Where Einhorn has an advantage over retail investors is that his cost of leverage is much much cheaper. (I work for prime brokerage of a major firm).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-20800789419461394852012-05-24T07:42:31.788-04:002012-05-24T07:42:31.788-04:00I don't know. But when I heard all of these h...I don't know. But when I heard all of these hedge funds looking for the next fat tail trade, I did get a sense that there is a lot of Burry envy going on.<br /><br />As long as the cost is manageable, I think it's fine. When Steinhardt and a bunch of others piled into the super-leveraged carry trade back in the early 90s, that was not OK since the risk was symmetrical; if the market moves against you, you are dead. <br /><br />With Einhorn's trades, that seems not to be the case. The $3 billion notional interest rate options is probably really out of the money so is a catastrophe trade of sorts... But the cost is just the option premium; known up front and can't get worse.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-10996363446407279472012-05-24T07:39:48.163-04:002012-05-24T07:39:48.163-04:00Hi,
Yes, it's a prime brokerage issue. Indi...Hi, <br /><br />Yes, it's a prime brokerage issue. Individual investors would have to set up a margin account for stocks to long short and then a separate one for futures etc... A prime brokerage account acts like one big margin account where hedge fund can trade all sorts of things and use one position against another. The portfolio can be used as collateral to put on swaps and other non-exchange traded OTC derivatives too, which retail investors can't do. For prime brokerage, clients are "exempt", I think from all sorts of things. Having prime brokerage accounts set up offshore also allows flexibility....kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-66221428544352347792012-05-24T04:33:54.437-04:002012-05-24T04:33:54.437-04:00Can you explain why Einhorn doesn't have to pa...Can you explain why Einhorn doesn't have to pare his equity portfolio to put these trades on? Futures need margin, options need to be paid for, is his equity leveraged or is it something to do with prime brokerage?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-23325873341095267692012-05-23T23:25:09.507-04:002012-05-23T23:25:09.507-04:00"a sizable position in gold, Japanese yen put..."a sizable position in gold, Japanese yen puts, short sovereigns and interest rate futures and long some credit default swaps on corporates and sovereigns."<br /><br />In totality, seems like a one way bet on a variety of global blowups...insurance indeed. Gold for inflation or other fiat current issues. Japan puts betting on more deflation? Weird since they're committed to printing their way to prosperity...<br /><br />I guess, the interest rate futures gamble on a yield curve blowout (same way as gold?). CDS -> more debt deflation.<br /><br />Its interesting to see how hes actively buying blow-up risk insurance for his portfolio while Buffett seems content not to. In fact, with those 2018 or 2020 index calls Buffett wrote it seems that hes actively taking on macro risk. <br /><br />I wonder who is right? What kind of risk premiums are out there for taking risk right now and is it worth it? Availability heuristic at play? How long do we remain scared shitless from the 2008 fiasco?Richiehttps://www.blogger.com/profile/08613606577369476902noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-53996510676873323912012-05-22T22:18:12.054-04:002012-05-22T22:18:12.054-04:00I didn't mean to compare Einhorn and Soros, ac...I didn't mean to compare Einhorn and Soros, actually. I had a bunch of themes all mixed up here. You are right, Einhorn doesn't have a track record in this macro stuff; I do remember many stumbling in this back in the 90s (I remember Steinhardt bragging how many millions he would make for every basis point move in the German Bund or some such, right before the bond market crash. Tiger had some macro stumbles too...). <br /><br />I do get nervous when stock pickers start acting like macro guys, but in Einhorn's case, he seems to keep his downside limited so he won't be down 30% because of a leveraged bond carry trade gone bad. <br /><br />The cost issue is just another thing altogether. So many people, it seems, got freaked out of stocks in the last bear market, sold it and turned into Michael Burry / John Paulson wannabes, it seems, and I just wanted to point out that there is a difference between individual investors trying to make macro calls using ETFs, versus hedge fund guys just overlaying trades in their prime brokerage account. It's a major point that a lot of individuals don't realize... <br /><br />Anyway, we'll see how this plays out...kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-54118881439899869442012-05-22T21:52:33.158-04:002012-05-22T21:52:33.158-04:00Interesting post. However I disagree with the anal...Interesting post. However I disagree with the analogy to Soros - who is justifiably famous for his long track record as a macro trader. In contrast Einhorn has no real track record as a macro trader and there's no evidence to believe that these macro hedges will improve his long term risk adjusted returns.<br /><br />The fact that they cost less is not really relevant - they're also exceedingly unlikely to pay off.Anonymousnoreply@blogger.com