“The great failure or weakness in the asset management business is that it is almost always long-only and investors just have to stomach the downside; unless they sell, which can often be the worst option,” says Will Rhind, the founder, and chief executive of GraniteShares.
“Investors are left to fend for themselves when you get these volatile markets.”
His comments are apposite given the extraordinary roller-coaster ride that international bourses have endured for the past month.
When Rhind talks of long-only investment he’s referring to the traditional means of making money with shareholders buying stocks to make gains as the price goes up.
Hold or fold?
When the market heads south there two options in a ‘long-only’ world: hold on and hope the white-knuckle ride heads higher - or sell.
As Rhind points out above, selling at rock bottom is not a good idea – the losses become real and baked in rather than notional and paper-based.
Strong nerves (and an even stronger stomach) are required to hold onto a position when the world appears to be collapsing around your ears.
Of course, the smart money, and by smart money I mean hedge funds, have the level of sophistication and access to cash to mitigate this downside and actually profit from falling markets.
They might protect their ‘long’ investment by taking out a ‘short’ position, which effectively acts as insurance against falling share prices.
Shorting in this way requires the hedge funds to borrow stock, sell it and buy it back at a discount, booking a profit in the process.
More than a defensive tactic
As well as being a defensive tactic, shorting can be used to benefit from the volatility caused by a falling market or share price. And to magnify profits (or massive losses if it all goes Pete Tong), the hedgies might add a leverage to the mix.
Here in the UK we have products that allow you to magnify your gains in this way.
However, it becomes an expensive pastime when you have to pay what’s referred to as a margin call to keep this leveraged position open.
As a result, the leveraged long, short and long/short plays have tended to be the preserve of the financially well-endowed, sophisticated operations.
Rhind and his team from GraniteShares have come up with a basket of exchange-traded products (ETPs) that allow you to go long and short with continuous leverage (without a margin call) on a range of well-known UK blue-chip shares.
Brexit was the original inspiration
The original idea was to create a product that allowed investors to trade the volatility around Brexit.
“None of us could foresee this particular crisis coming on with volatility on par or slightly worse than what we saw in 2008,” says Rhind of the ‘corona-crash’.
These GraniteShares ETPs give sophisticated private investors and fund managers the opportunity to go long or short on ETPs in 11 of the Footsie’s most liquid shares with three-times leverage.
So, it would have allowed you to short Shell and BP in the aftermath of OPEC’s supply war on Russia, which would have proved a profitable strategy.
Equally you could have taken a long position in the same two in the last week, which would have delivered stellar returns as stock in both recovered. The table below shows how you would have fared over recent weeks going long or short using these Granite’s products.
“A lot of people in the market are already investing in the shares [tracked by Granite’s ETPs],” says Rhind
“So, we provide a way of either getting more exposure to them with less capital because they are bullish. And obviously, if they are bearish, or want to hedge, they can go short.”
Exchange-traded fund specialist Rhind and his team launched GraniteShares in the US in 2016, and set it with a mandate to shake up the commodity investment space.
It has very quickly grown into something much more than this, with £632mln of assets under management and products listed in New York and London.
Backed by alternative asset specialist Bain Capital, the business takes its name from Rhind’s birthplace, Aberdeen, also know as the Granite city.
“We are providing investments that help people through all market cycles and that’s the thesis behind what we want to do as a company,” says the GraniteShares CEO.
“We want to provide opportunities to investors, provide them value — in all markets.”