For the year Greenlight returned 2.9%, 2.7%, and 1.9% across their various funds. They have annualized 20% net of fees since inception. In the letter he discusses the European crises, some of his short positions (FSLR and GMCR) and his position that he shares with Kyle Bass on the weakening of the Japanese Yen. He also goes on to discuss Dell and Xerox is some detail.
But of Course There Is No Free Lunch! (And one important point)
If something is too good to be true, it usually is. Or look around the table when you’re playing cards. If you don’t know who the sucker is, it’s probably you! I have one important point to make about volatility and options. Options and futures decay over time. When you buy an option, it has an expiration date. The closer you get to the date, the less valuable the option, other things being equal. This means that your holdings will erode over time. Therefore if I’m buying VXX, it is natural for the value of my holding to decline over time. As we discussed in a previous post, the VXX tracks an index. The index is made up of near term futures. What happens when the futures are close to expiring? The answer is new futures are acquired that have an expiration date that are further out. Because these futures contracts are by definition worth more, given the longer expiration, they cost more to acquire. You can think of this as increasing the cost of the VXX, or lowering the overall value. The cost to acquire these new futures is called the “rollover yield”. You can google this term and you’ll see tons of explanations for it.
Here is the kicker: under normal conditions, the rollover yield is 3% per month. Therefore if I hold the VXX over a one year period, the value of the position should be lowered by 36%!! If you are betting against the VXX, this is like having the house tilted to your favor. Another metaphor: you are swimming with the tide. Yet another: you are playing with the extra attacker on the field.
So here’s the interesting “theory”. Hold the VXX and watch it erode… to nothingness…
So is the punchline we should simply short the Vix, a complicated, convoluted product that has the tendency to trade down? I asked two of my friends about this. The first said, “yes, you can short it, but occasionally you will get your face ripped off”. The other laughed at me and said, “go right ahead, if it is such a sure thing, I’m sure the market makers and other sophisticated investors won’t give you a beatdown!”