Kaegi2011

As someone suggested above, why not go for a collar (long put and short call). If you're buying close to ITM the costs generally offset. You'll have downside protection in exchange for further upside. Effectively selling without the taxes (for the duration of the options) - just know that if you do get called or need to buy back the option at higher price you need to put in more money, either to the IRS or to the counterparty, so make sure your expiry dates are appropriate.

One very high level way to rationalize it (not sure if it's the correct way...) is to think about the leverage in the system. If the economy is more levered than before, than smaller % nominal changes can lead to same if not higher equity changes. If one were to argue for this strategy, I think that would be a rather intuitive and compelling argument (for me at least).

SD - with due respect -- and I do mean it, as I've found your comments elsewhere to be generally insightful -- while I agree with you on the concept, the real world companies that I've worked for do not work this way. SC financing are **generally** not done out of a cohesive logic regarding shareholder returns or value maximization in the long run, but rather incentives at the micro level. A couple of examples that I've witnessed: 1) The CEO/COO are told they need to lower working capital by the Board b/c McKinsey did some work and shows your Shitco is 4th quartile on W/C. Reducing inventory is really hard work without taking on operational risk, and it's much easier to negotiate with suppliers for better terms. That work is further reduced when the customer asking is offering an easy out - e.g., supplier financing that's relatively cheap. For the supplier many get to receive cash faster with some financing cost, and many do take it. The treasury group does not get a say in this - they are the intermediary that facilitates the interactions with the banks, assuming they're asked to do so at all (they are on the sidelines occasionally too). 2) The company has made some promises to the street to do a stock buyback on a leverage neutral / friendly basis. TO fulfill that promise it's going to pull an easy lever - financial engineering. SC fulfills that promise, and does not show up anywhere. It's not a required disclosure (vs. something like AR securitization). Little by little W/C comes down, and analysts cheer the operational improvements that the mgmt team is achieving. 3) The company promised the rating agencies of a certain operational plan, and are told that if they continue the progress they'd be very close to an upgrade (worth 20-50bps across the entire stack when refinanced). However, the easy fruits are gone, and SC financing looks very appealing... For a treasurer whose career track would be dramatically helped with a ratings upgrade, it's a pretty good carrot. Point is - across various constituencies within a public co the SC financing option is just the easy button, and nobody needs to know about it, which is why it's so damn attractive. A few other comments: 1) Not all suppliers offer early pay discounts (currently working for a company that doesn't offer it at all - like never. We'll negotiate on the days, but no discount for paying early). The % that do this is higher than I thought. 2) This game is being played by both customers and suppliers, so unless a company is in a business that sells to consumers it's just as likely to be on the receiving end of it. 3) I'm not sure I quite get your calcs on the increase in cost of debt, but if it's 10-25bps in as total incremental cost of funding, then that's a really significant amount. It's really not trivial when companies are looking for bps in terms of funding cost improvements...

Agreed. If it's a slow drip without vol going up it's not going to hedge much of anything. I think this works b/c 1) due to the infrequency of events the market underprices the risk, and 2) the explosion of vol assumptions in the underlying instruments - both of which contribute to the convexity of the payoffs.

This is the answer. In effect it's taking off the A/R off of the balance sheet of the supplier and creates better optics for both supplier and customer. Banks/funding institutions are willing to take the risk b/c it's just another short term credit market (e.g., commercial paper) and counterparties are very credit worthy. So in effect the cost isn't really cost of funds for the supplier, it's the just a small discount to the supplier, especially in these days when rates are zero... The cost is the (discount x 365)/(term - discount period) - and it is expensive financing. The cost of (1/15, n90) is (1x365)/(90-15) - or 4.87%; the more traditional terms are (2/10, n90) is (2x365)/(90-10) - or 9.12%. The treasurer of an Apple, Amazon, etc. just borrows cheap on their credit line, pays the invoice early, and keeps the spread. SD Not exactly. The decision on paying early or not to get a discount is obviously based on the level of discount, so if the discount is hugely attractive then it may always be worth it. However, for public companies at least, the optics of higher debt balance and lower AP / WC balance is worth something (sometimes a lot more than "something"), so supply chain financing can often step in when the early pay discounts are not significant enough to outweigh that.

This is the answer. In effect it's taking off the A/R off of the balance sheet of the supplier and creates better optics for both supplier and customer. Banks/funding institutions are willing to take the risk b/c it's just another short term credit market (e.g., commercial paper) and counterparties are very credit worthy. So in effect the cost isn't really cost of funds for the supplier, it's the just a small discount to the supplier, especially in these days when rates are zero...

Vinod - appreciate the response. Gonna try to dig deeper to find someone who can explain how this all works b/c I feel like I'm really missing the forest here. :)

Is the ultimate measure of success whether they made or lost money? Because if that's the yardstick, then propping up asset values is always going to look good in hindsight. They might as well go into CLO equity as the return will look even better. I don't mean this as a sarcastic comment at all. I think there was a major line that was crossed this time around with the Fed in terms of its programs and the markets it participates in. If the intent to "preserve" asset value what's the difference b/t equity and credit? Why not just go into SPY? It seems like a major slippery slope. One that I very much dislike on a principal basis as a citizen (but my accounts are better for it...).

You're right, we would not. But if one had invested with the at the beginning, that portfolio is still likely to outperform the S&P, but then you're saying it's luck and not skill. Fair enough - not for you. Maybe we can get back to the topic of whether there are potential instruments to use for the future, or the relative merits of those. For HYG/LQD - they seem to be far less sensitive to equity movements outside of a crash scenario. Now that the Fed has effectively backstopped LQD it seems like significant near term price declines are unlikely, thus probably rendering puts on LQD as ineffective. Not sure about HYG as real distress has yet to work its way through the system, and the Fed is also soft backstopping that market as well (writing puts seem reasonably interesting tho...) So that does leave VIX as another candidate - will be looking into calls on the VIX, as well as ETN/ETPs on vol.

I don't know their performance from Feb 2010 to Feb 2020. Implicit in that question is what happens when there are no major drawdowns - I would assume it's not very favorable. But that goes into the bucket #3 that I mentioned above - which is that you don't think significant drawdowns will occur in the future and therefore insurance is not worth buying as it'll never pay off. Of course if that's your view then there's no reason to buy insurance.

So far you've simply stated your opinion, and if you want to believe that it's fine. I'm not trying to argue about your opinions. But that opinion does not hold water against actual performance in the documents shared above. So you have pretty much the following arguments: 1) You the think the numbers are inaccurate and does not reflect actual performance (again, they only take institutional money with minimum account sizes of greater than $150mm, so I don't think this is realistic, but it's possible - maybe it's another Madoff, and if you have suspicion I'd love to hear the logic...) 2) You don't think the market pricing for selling protection going forward will be as friendly going forward, and pricing of these products will go way up to reflect actual risk (certainly possible, maybe even expected, but I would have thought the same after GFC, so would be curious to hear why you think this) 3) You don't think markets will decline going forward 4) Some combination of 2/3 above Below are the relevant paragraphs where I'm wondering if you've read the letter... "A 3.33% portfolio allocation of capital to Universa’s tail hedge added 12.7% to the return of an SPX portfolio in March 2020, added 11.6% to the CAGR of an SPX portfolio since 2019, added 1.7% to the CAGR since 2015, and added 3.6% to the CAGR life-to-date (since its inception in March 2008). The Universa risk mitigated portfolio has thus outperformed the SPX across all of these timeframes, accompanied by—or, more accurately, because of—far less risk (as evidenced by the March 2020 and the 2008 columns)." And, to answer the persistent skeptics of our strategy out there, let me point out that we certainly didn’t need the Q1 2020 market drop to add risk mitigation value. At the end of 2019, for instance, Universa’s life-to-date risk mitigated portfolio CAGR exceeded the CAGRs of all of the other risk-mitigated portfolios (including, most notably, high-duration bonds), as well as of the SPX alone, by from 2.2% to 4.2%."

Have you read their research? If so, and you disagree with their figures / outcome, can you explain why? Not sure what you mean by whether I disagree with their outcome or not. If you are basing the value of an "insurance policy" on the date right after the loss, of course it'll outperform. Over time, the amount you pay for insurance is not usually a profitable investment. But you're speaking in generalities. For you to invest in their strategy you have to believe that protection pricing is improperly priced. Based on events over the past twenty years (tech bubble, GFC, and now this), we've had more than a few 20 sigma events. B/c if you believe that their 34x return is correct, a 3% allocation means they can go 11 years without making any profit to break even, and they're providing you cash at the most opportune moment (E.g., a crash) to compound. So again, is there anything specific that you disagree with?

Have you read their research? If so, and you disagree with their figures / outcome, can you explain why? Everyone has their research and everyone makes bold claims. Motley Fool beats the shit out of the market too apparently. Financial Services firm research is mostly bs. Especially stuff done only for accredited investors. I'd even point out that unless they have additional disclosures, spamming Twitter like they were doing not long ago is a major no-no in the business as well. I think since they only market to exempt participants, they can get away with it, but its definitely sketchy. I'm sorry I'm missing specifically what it is about their strategy that you disagree with? Or are you suggesting that they're just straight up lying about their performance in that very specific account letter?

Have you read their research? If so, and you disagree with their figures / outcome, can you explain why?

Well isn’t this the point of insurance? You hope you don’t need it but it works well when shit hits the fan? A 30x return pays for a lot of years of complete donuts.