Short market comment

This is basically the same text I used as an answer to a comment on a previous post:

In short: Stocks are currently (March 16, 3pm Central European Time) down by 33% from February 20, 2020. My base case if the corona situation develops in a benign and controlled fashion is another -33% (to a total of -55%). That should take most stocks to fair value, not cheap, and enable fundamentally based investments.

If things turn ugly we could see a third -33% (to a total of -70%), and given the adverse effects on the economy that would still not be cheap, just fair. Worst case scenario is a fourth -33% (for a total drop of 80%) on top of the first 3.

I expect maximum quarantine/lockdowns in most of Europe by end April and maximum US by end of May (with perhaps 50m US citizens infected). Maybe stocks will bottom by then, since everything about this crash is faster, bigger, more frequent than usual. But the recession and financial crises that follow will probably take markets to a lower low further down the line. In any case we should see a bottom for stocks within 12 months from now, as long as we don’t get a second virus attack of a different strain (unlikely but could happen).

as long as we don’t get a second virus attack

Volatility will be much higher than anybody expects, except Hussman. We could see rallies and drops by 20% on single days (circuit breakers prevent more than -20% and close the market for the rest of the day).

If central planners manage to lift markets with a quadrillion in helicopter money, gold will rise even more than stocks. I would take every opportunity to load up on gold and Bitcoin now that they are falling with the rest of the market due to margin calls. I don’t think gold will fall below 1250. And I think it’s an extremely good buying opportunity here at 1475.

And 6 months from now silver might bottom at ridiculous levels and provide the real buying opportunity of the century – or at least the decade. Maybe silver will rise by 1000% from 7 or 10 to around 100 in the coming years. And gold could go to 5 000 or 10 000 USD/oz after the current little correction.

NB, NO recommendations given here. Do your own research. I hold no licences and I never give recommendations to buy or sell financial instruments or anything else.

How to (not) get rich managing a hedge fund

Topic: the economics of running a hedge fund

How much money do you need to manage in a hedge fund?

Let’s say you manage to raise 100 million dollars from friends and family. How far would that get you?


Fixed fee: 1% of 100m = 1 million dollars a year

Performance fee: 20% of whatever your “outperformance” is, which depends on what you’ve promised, and if you have some catching up to do relative your high water mark or other promises.

We’ll leave that part for later, since you can’t really count on reliably amassing performance fees. On average fund managers don’t add any value relative their benchmarks, so on average fund managers can’t expect to get any performance fees.


Staff: 3 people (you, a partner, and one more for research and administrative work) at 150k$ each a year, which would be considered the bare minimum for running a 100m$ fund and attracting decent talent. 3*150=450k$.

In Sweden the cost of 150k$/yr amounts to less than 10k$/month (95k SEK) per employee before taxes but after social services fees. The take home pay for the employee after personal taxes will be around 5.5k$/month (55k SEK)

Travel expenses (eight trips per employee/yr to attend conferences, visit important companies, clients etc. NB just two trips per quarter, and at a cost of just 2k$ per trip for a few hotel nights, airplane tickets and expenses): 8*2k$*3 = 50k$

Premises: 50k$ per year for an average office in the CBD district

Equipment, computers, mobile phones: 2k$/yr per employee = 2*3=6k$ (could just as well be rounded to zero)

Information and trading systems, 3rd party research: 50k$ per employee = 3*50 = 150k$ (NB: the cost could easily run to twice that)

Regulatory fees, expenses, insurance, securities custody etc.: 0.1% of AUM = 0.1%*100m$ = 100k$ (could easily be twice as much)

Total costs: 450+50+50+6 (rounded to zero)+150+100 => 800k$ (or up to 1m$ depending on information costs nd regulatory expenses)


Income before performance fees and taxes: 1 000k – 800k =200k$ (or as little as zero)

Income after taxes (25%) per employee (3): 200 * (1-25%) /3 =50k$ (or zero)

Bonuses and dividends

The above example leaves just about no room for bonuses, and thus little chance of retaining high quality employees (including yourself). In addition if you can’t perform good enough for a performance fee, even your friends and family will jump ship before long.

Let’s say you outperform your threshold by 5-10 percentage points, how far would that get us?

Performance fees for 5-10pp outperformance: 20%*5%*100m = 1m$, and 20%*10%*100m = 2m$.  That would leave 750k – 1.5m$ after taxes for distribution to the owners, or a decent 250-500k$ each in dividends that year. Now, I wouldn’t get my hopes up too much for repeating such a performance year after year.

In addition you’d run the risk of falling behind during difficult years. While struggling to catch up there could be periods of no performance fees in sight for years at a time. What if your fund lost just half of what the market lost in the crashes of 2002 and 2008? Even with such stellar performance, you’d still need 3-5 years per crash to catch up before earning variable fees again. Most actually give up altogether, after losing more than 20% from their high watermark.


Even a 100m$ hedge fund is more or less a break even operation, where its founders or employees get a basic annual compensation but no frills. The upside consists mostly of soft factors, like independence and freedom, plus the potential for landing a few lucky big years before enduring a crash. If, however, the order is reversed they get nothing extra.

Please note that if you simply had 5m$ of your own and made a 10% return, without the hassle of running a hedge fund (clients, authorities, regulations…), you’d net a clean half million dollars for yourself. In Sweden that would be after taxes, since personal capital gains are tax free here.

Running a billion dollar hedge fund or bigger is a whole different game. We, e.g.,  managed our +1B$ fund with more or less the same crew as when it was a tenth that size.

At fixed fees of +10m$ a year and performance fees of typically at least as much, and total costs before bonuses, taxes and dividends, of around 2m$, there was plenty to go around for us four principal owners. Now, try a 10B$ fund on for size in terms of its economics!

What ever happened to all the perma bears?

We all live in a yellow perma bull, yellow perma bull! Bull market in the sky with diamonds! …markets that grow so incredibly high…

All you need is bull
All you need is bull, bull

Bull is all you need

To cut the cheese, there never were any perma bears to begin with.

Yes, you read that right. No matter what you might have heard, there has never been such a thing as a perma bear. You’d better check your sources.

There are of course quite a few people using that term, as if it meant something. Those people typically fall into one of the following categories:

Perma bulls:just buy and hold the best companies forever” (at any price); these guys disappear with the next downturn never to be seen again. Some of them bought Broadcom, Worldcom and March1 on margin in the year 2000. Others had five mortgages in 2007. Yet others were all in the XIV ETF (inverse volatility)

Newbies: they are simply parroting a meme their broker, or similarly clueless friend, told them. They have no idea what they are alking about, what a perma bear or perma bull might be even in theory.

Failed short sellers, that failed because they didn’t do any real research or succumbeed due to sloppy risk management

The average retail investors have never even contemplated going short anything, although a few have dabbled in buying a few puts or selling calls to add some “Las Vegas” to their “portfolio” (of one single stock; either a 100m$ pre-revenue biotech company, or whichever stock is the most written about [Tesla, Theranos, Enron] or having appreciated the most (FANG stocks).

Normal portfolio managers in mutual funds aren’t even allowed to go short.

That leaves more or less only sophisticated and experienced investors on the short side. Most of them are hedge fund managers that already have successful investing careers behind them. Some, admittedly, might be rich brats that think “shorting the hell out of bad companies” is a better pick up line, than letting their zero maintenance dividend kings take care of themselves while going all in on hookers and E on a yacht.

Anyway, these sophisticated investors typically made their money mostly being long good investments, thus per definition can’t be perma bears. Or they are extremely good at sniffing out good clean shorts.

In any case, if they are that good at researching and investing, there is zero probability they will limit themselves to being short only, when there are so many more things to go long with less risk and less scrupulous opponents than when selling things short.

In other words, only smart people become short sellers. The idea doesn’t even occur to average people. And if it did, Joe would soon lose everything and give up, or re-emerge as first a cautious, later a raging bull (only to lose it all again of course).

The smart(ish) short sellers are smart enough to know there are two sides of every story, of every market. Hell, they are more or less the only ones who realize there are two sides.

I have yet to meet or even hear about a real perma bear, an investor who is forever and always only a seller of all things. That’t because they simply don’t exist. “Perma bear” is something n00bs and mostly perma bulls call people they don’t understand and are afraid of: investors with more money and experience than themselves that dare go against the crowd and look a little silly for a while, because they have good reasons to trust their mind more than the crowd’s blind stampeding.

It’s been a a hard bull’s night,

and I’ve been working like a bear

So, whenever you hearthey’re a perma bear,” check your and their premises. You just might pick up something important and useful.

Just remember that there are no perma bears; and experienced and knowledgeable investors who dare stick their neck out against the crowd, against CEOs, against the Fed and other authorities to reveal relevant information, put both their money and reputation on the line for no other reason that their superior vantage point allows them to identify a higher probability of making money going short than buying blindly.

Tell me that you want the kind of things,
That bulls just can’t buy,
I don’t care too much for bulls.
Bulls can’t buy me love.