How Hedge Funds Can Outperform in Bear Markets

Hedge funds have the secret sauce which maybe we can replicate.

Hedge funds know equities are precarious with more FED hikes on the horizon and the dovish FED narrative completely disintegrating. Making money isn’t as much the potential opportunity, but what your actual risk exposure is to make a return. Here are some opportunities I’ve picked up from listening to fund managers

1.) Cryptocurrency Arbitrage

You need some serious money to even get started here, but basically the premise is you find market inefficiencies in the top 20 crypto exchanges and after fees you still make money on creating liquidity. I’ve looked into this in the past, but truthfully the best spreads usually have the worst liquidity, but the best liquidity has fractions of a penny difference, so this is why you need lots of money or patience to get started.

2.) Reinsurance, Retrocessional Reinsurance, and Catastrophe Bonds

This one also requires a minimum investment of $100,000, but CAT bond spreads have hit an all time high after Hurrican Ian decimated reinsurers balance sheets. Lightning can strike the same place twice, however if you can make a calculated risk there hasn’t been a better time to be a market participant in this area since Hurricane Katrina.

3.) Litigation Finance

Basically a legal case is provided funding in exchange for the eventual settlement. This hasn’t been an option for retail investors for a long time, but now there are some retail options. With returns beating real estate and credit investors we see there is some serious upside here.

Omni Bridgeway Limited (ASX:OBL) can provide a retail investor exposure to this or a cryptocurrency from Switzerland called $LITI. If you can only find $wLITI on coingecko like me, that was actually done by design. Holding $LITI (currently selling at $85) gives shareholders 80% of a 30% slice of a settlement in the form of a dividend payment. Something to consider, but I’m still a little hungover on crypto personally.

4.) Synthetic Credit

Unless you’re trading with Goldman Sachs or can find a bank willing to be counterparty I wouldn’t really worry about this one.

5.) Trade Finance

Following the 2008 financial crisis banks reduced their exposure to trade finance to meet Basel III (set to upgrade to Basel IV in January) capital requirements. There is now a $9.5 trillion gap in the trade finance market. One market player Finverity sets to fund that gap, but you need to be certified. Another one which is hard to break in for retail.

6.) Prepayment Mortgage Swaps

Not quite a CDO, but not strictly insurance. This instrument is somewhere in the middle for a risk averse MREIT who would want a counterparty to take the prepayment risk in a rising rate environment. A very complicated instrument and most definitely not available to retail.

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