Well, the market proved Dan right yet again.
ARK Investment Management, CEO Cathie Wood, and their ETFs lost three out of their 60 billion last week — Dan knew from ARK’s ballistics charts that the stock seemed to be topping out.
While he applauds Cathie and her company for getting into the disruptive tech game in 2014, he knows that Tesla and Bitcoin (part of ARK’s ETF bundle) remain hot stocks that are way ahead of themselves — and too easily swayed by an Elon Musk tweet.
Everyone wants to be in the market right now, but when stocks top out like this, Dan likens it to people contentedly queuing up for a Broadway show, only to be slaughtered once they get inside. Or, in other terms, be cautious right now, investors.
Dan’s guest this week is Yoav Sharon, a portfolio manager for the Driehaus Capital Management, in charge of investment research and securities selection. He boasts 16 years of industry experience and has been a senior member of Driehaus’ investment team for eight years.
Event-driven investment strategy is a topic Dan has never covered before on the show, so Yoav breaks it down for us: it’s a niche part of the market that takes advantage of company-specific catalysts. The following events would qualify: mergers and acquisitions, arbitrage, corporate restructuring, and complex business models like healthcare.
Yoav’s fund sees and seizes these moments, explaining that event-driven investing only goes to where the opportunity lies. This strategy provides a limited correlation to broader markets, less volatility, better performance, and capital preservation during drawdown periods. Yoav also reveals the critical markers to determine whether market events are worthwhile and shares a bevy of other alternative investing tips.
Listen to their conversation and much more on this week’s episode.
Your podcast host, Dan Ferris, recently went on-record saying: “If I had to put ALL my money in 1 stock – This Would be It.” Get the Full Story Here.
Also, check out a new episode of Stansberry’s podcast where politics and economics meet, American Consequences with Trish Regan.
Yoav Sharon is a portfolio manager for the Driehaus Event Driven strategy. He is responsible for idea generation, portfolio construction, security selection and investment research.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour. Tune in each Thursday on iTunes, Google Play and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Heres' your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host, Dan Ferris. I’m also the editor of Extreme Value published by Stansberry Research. Before we get into today's episode, don't forget. Trish Regan is now a part of the Stansberry family. Check out her podcast, American Consequences With Trish Regan. The link will be in the description of this episode. Today, we will talk with Yoav Sharon of Driehaus Capital. Yoav works on a fund that focuses totally on event-driven investing.
We have never talked about this. I can't wait to talk about... to this one guy who specializes in this thing we know nothing about. It's going to.be awesome. In the mailbag, we'll talk about bitcoin, bitcoin, bitcoin, gold, zombies, and commodities. In my opening rant this week – hey, I told you about Cathie Wood and Ark Investment Management, and I was dead right. Though admittedly, very lucky on the timing. We'll talk about that and more right now on the Stansberry Investor Hour.
So hey, look. I got lucky on timing, but I kind of called it a little bit here. I said in two places, right... I said in the episode last week, and I also said in my Stansberry daily Digest recently that Ark Investment Management's ETFs – this firm founded by Cathie Wood who appears in the media a lot. She was on Bloomberg again this morning. I said it was basically a sign of the top, right? If you look at all the Ark ETFs – and the ticker symbols for almost all of them are ARK and then like ARKK, ARKG, ARKF, etc. And one of them is PRNT. I think that's the 3D printer ETF. And all the charts are ballistic.
And when I say a ballistic chart goes straight up like a ballistic missile – right. And when they correct, they don't go sideways. They crash. Now, I'm not saying that what's happened in the past couple of days here earlier this week was a crash. However, bitcoin was down and Tesla was down. And those are the two big holdings. She's got Tesla as the biggest position in three of her ETFs. And like, ARKK was down 16%, ARKG was down 15%. Those aren't big numbers. I mean, they're big numbers for a day or two, for an ETF. But more to the point, they suffered their biggest-ever outflows, and overall their ETFs lost about $3 billion out of the $60 billion in them.
Between the share prices of their assets falling and between the people redeeming, basically the money flowing out of the funds, they lost about $3 billion. Just like that. Boom. Couple of days. From Friday through Tuesday, I think. So this is just – it's a toppy thing, right? It looks very... it's exactly what happens at the top, right? The most popular thing that everybody's in love with – which you got to admit, Tesla and bitcoin are what everybody's in love with. And by association, Cathie Wood's Ark funds – they hold plenty of Tesla and bitcoin and lots of other new, disruptive technologies. And I gave her credit all day long for starting this thing in 2014. 2014 she started this company to focus on disruptive technology. What a great call, right? Great call. And some of the funds actually kind of have gone sideways, not done great.
But overall, they've done great. They went from – I think they had like $3 or $5 billion in assets maybe a year ago or two years ago or something, and now it's like $60 billion. It's incredible. So she gets all the credit all day long. Do not misunderstand what I'm saying. I'm not saying Cathie Wood is stupid, and her funds are stupid. No. No. One of the points we made, remember, that George Soros makes – and we talked about this last week – is that these like bubbles and speculative manias... .they're based in reality. The Internet really was the most amazing thing. But the dot-com bubble was still a huge bubble, and there were a lot of garbage companies that needed to go away.
And it crashed like all bubbles do. But hey. You know, Amazon and Google and Facebook and Apple and all these big companies, you know, they've done phenomenally well. And the Internet has become an amazing force in our lives. So there's lots of truth in what Cathie is doing at Ark. And I admire it for it. But I'm sorry. That's not the only thing that determines a great investment. You know, there's all kinds of other stuff – the fundamentals of the companies. And the fundamentals of Tesla aren't that great. You know? I mean, it's more than the next 10 car companies – it's valued higher than the next 10 car companies, publicly traded companies, combined. and they produce combined like... you know, it's at least 20 or – I think it's like 30 million cars a year. Some huge number like that, right?
And Tesla makes like half a million a year. It's just crazy. It's crazy. The stock is way, way, way, way ahead of itself. And then, he discloses that he bought bitcoin. Oh, and that's another reason to own Tesla for some reason. It's all ridiculous, right? It's gotten ridiculous. It's gotten too speculative. And Cathie Wood and Ark, I said it's a symptom. It's a sign of the time. And Tesla and bitcoin get hit. Money starts running out the door in record amounts, and all of a sudden, "Whoa. Whoa. Whoa You know, these funds seem like a bad idea all of a sudden." Now, do I think this is it? Do I think this is the end? Maybe. Market tops are a process. It takes a while. And it's very volatile. I don't think this is necessarily the top, but it's part of the top for sure. It's part of it.
This is exactly what happens, right? The frothiest, most optimistic, overvalued ballistic-straight-up-on-the-chart garbage. I shouldn't say garbage... stuff. There is a lot of garbage in it, but stuff. You know, it starts to fall apart. And the story is going to get worse. And we had our listener – I think it was James W. wrote in last week, and he said, "Hey, man. You got a bad grade on the" – I didn't read his question. But he wrote in and said, "You got a bad grade in the Stansberry report card, and you're criticizing Cathie Wood." Just wait for the other shoe to drop, James. That's all I'm going to say, right? And our grades are a lot different than the kind of grades she's getting, right?
Our grades, they're very well thought out, and the grades she's getting are just based on what the returns were in the last three years. That's it. So be careful. The money can and will and does run out the door like gangbusters as quickly as it ran in – faster than it ran in, right? Faster, even. I bet they never took in $3 billion in a couple of days. So yeah. Just be careful. And I think for me, Ark is sort of... it's a little bit like Lehmann Brothers though not nearly as egregious. The way in which it's like Lehman... and we said in Extreme Value in the newsletter I write for Stansberry – we shorted Lehman in April 2009. And of course, it went bankrupt like September of that year.
So it was a great short. And we found everything about that bubble under one roof. There was leverage at 30 or 33 to 1. There was dramatically overvalued real estate and private equity all in one package. I think they had bought a big piece of the Archstone Trust deal, as I recall. And there were like level one and two and three assets... like level one assets or things that you could just look at the market price, and it's liquid, and you can value it instantly. And then level two and three, it's like the company has more leeway. And I was asking, "How come the level one assets are way the hell down, and the level two and three assets have not been marked down?" It's ridiculous, right?
And it's all the same stuff. It's just a less liquid version. So there was no way that it should've been that way. And of course, it turned out horribly, and Lehman disappeared after a century or so-long history. It was tragic. And I hope it doesn't turn out tragic for Cathie Wood, because I think she's done a great thing. But she is a sign of the bubble. And she does have everything under one roof because she set out to be the ETF company or the fund company that buys disruptive innovation. So this is a huge tech bubble. So, you know, she's got every bubbly technology under one roof. And she's selling dead against it too. So, you know, we get to have under one roof.
And there's bitcoin in there. And we get to have that, and there's Tesla. We get to have that. It's just, you know, it's got everything under one roof. Everything about this bubble under one roof. All right. I think I've made my point. OK? I sound like I want to dance on Cathie Wood's grave, and I really don't. I'm just kind of doing a tiny little victory lap – teeny, tiny victory lap because it just so happened that right when I'm warning everybody about the Ark funds going ballistic, they had a real bad week. That's all I'm saying. OK? And, yes, I think it's worth saying because I think it's worth identifying everything about a bubble that you can identify. And when you get it right, you got to say, "OK. We've got a handle on this. We got this right. We understand it."
And that's what I'm saying this week. OK? All right. It is time, once again, for my quote of the week. This is a quote by Nassim Taleb, and he wrote a really cool little book called The Bed of Procrustes, which is all – it's basically a book full of quotes because it's a book full of aphorisms –philosophical and practical aphorisms it's called. So, you know, everything in the whole book is just like one short, little one- and two-liners kind of thing. And this is a quote about the stock market that I think is just perfect for this moment. And he says, "The stock market in brief – participants are calmly waiting in line to be slaughtered while thinking it is for a Broadway show." That's the whole quote.
And that's what happens at the top, right? Everybody is most excited to be in the market and most optimistic around the top, right? And I've talked before and I'll talk again. Topping is a process, right? It's not a single event. It happens over a period of time. Stocks become very volatile. They're up, they're down and then all of a sudden they're just not up anymore. But it can take quite a while. It can take months or even a year or more. And I believe that's what we're going through now. And so, at the top that's where everybody is just so happy to be in the market, and yet they're really like waiting in line to be slaughtered.
So maybe I'll read it one more time, then we'll move on. "The stock market in brief – participants are calmly waiting in line to be slaughtered while thinking it is for a Broadway show." Perfect. All right. Let's go now and talk with our guest, Yoav Sharon. Let's do it right now. If you've been listening to this podcast for any length of time, you know I don't make a lot of recommendations on investments. However, for a short time I will be sharing not just any recommendation but my No. 1 recommendation right now. This is the one where if you said, "Dan, I’m going to put a gun to your head. You got to put all your money in one stock, what would it be?" it would be this one easy. It would be the easy decision. Now, my Extreme Value newsletter readers are the only people who can get access to this recommendation.
But I did do a video recently to share my story about this company and one of the main people behind it. So if you're interested... we sat me down in my house, and they put a camera and a microphone in front of me. So if you want to see me get really, really worked up about one of my investment ideas on camera, this is your chance. And I am worked up. It's an incredibly cheap stock. I think it can return something like, you know, 10 times your money over the long term – like over the next five to 10 years. Something like that. And I'll tell you in the video why I think it's the perfect moment for this stock. It's just the right stock at the right moment with the right management team, right business model. It's awesome.
So if you want to see the video we did, visit extremevaluevideo.com. You got to get in before it's too late. The video won't be up forever. Won't be up very long at all. Again. This is the one stock I'd put all my money into if you made me do it. Website again is extremevaluevideo.com. Check it out. Today's guest is Yoav Sharon. Yoav Sharon is a portfolio manager for the Driehaus event-driven strategy. He's responsible for idea generation, portfolio construction, security selection, and investment research. Mr. Sharon has 16 years of industry experience with 13 years as a buy-side investor and has been a senior member of the Driehaus Alternative Investment Team for eight years. He joined Driehaus Capital Management in 2012. Yoav, welcome to the program. Thanks for being here, man.
Yoav Sharon: Thanks for having me.
Dan Ferris: So the first thing that I'm curious about is, were you one of these guys who bought their first stock when they were 10 years old, or did finance sort of show up in your life later on?
Yoav Sharon: Oh, that's interesting. No, I definitely was not one of those kids looking up the stock quotes in the paper at age 8 or 11. I was too busy I think being engaged in sports. But once – I took an econ class in high school. And that I think started the path toward being interested in, you know, essentially economics and finance and obviously through college and then post-college. That was how my world unfolded.
Dan Ferris: Right. I find that with lots of folks. They just discover it in college and get bit by it, and then that's it for the rest of their career. So I just want to jump right in here and talk about event-driven strategy. I don’t even think we've ever discussed this topic one time in a couple years now of me doing this podcast. So maybe the first thing you need to do, Yoav, is tell us what the heck event-driven means.
Yoav Sharon: Sure. Yeah. No. It's a great point. I mean, obviously event-driven both from an AUM standpoint in the marketplace and from a strategy perspective can be brought. But also in a way kind of nichey. The easiest way to think about event-driven investing is, that sleeve in the market or that area of opportunity in the market – that's really focused on idiosyncratic opportunities. So, you know, obviously there's two broad ways to gain exposure to the market. You have beta or traditional long-rolling asset classes, and then you also have focus or an area of opportunity on alpha generation, essentially stripping out the market exposures or the market risks that's associated with investing and really trying to isolate and identify idiosyncratic situations.
So, you know, if you think of a traditional investing where if you have an eye chart, maybe beta is accounting for 80% of that pie chart and then idiosyncratic or alpha generation is accounting for, say, 20% of the return generation as well as the risk exposures. If you think about a venture of investing, it's flipped on its head. So the lion's share of return generation and essentially the focus of event-driven investing is to isolate these idiosyncratic opportunities – these catalysts, if you will – in order to drive returns while eliminating or hedging or minimizing all the market factors. Whether it's Dow factors or industries or just broad beta.
And I think what that produces – or as a result of that what you are able to achieve – is obviously alpha generation, when done well, but also limited correlation to broader markets, less volatility to broader markets, better performance or preservation of capital during periods of drawdowns. So those are kind of the key tenets or the cores of event-driven investing. In essence, focus on company-specific idiosyncratic catalysts that are going to unlock value or accrue value, drop of capital structure, and less of a focus on a broader market.
Dan Ferris: So, Yoav, if I just bring up a chart of Driehaus event-driven for our listeners – ticker symbol DVDEX – I sort of see the lower volatility, maybe in general until we get to like the last 11 months or so. And off the bottom of the COVID bear market, just call it late March of last year, you guys are looking – I don't know if I'd say ballistic, but up 40% is –that's a big year for you guys. I mean, most people don't think of volatility as going in both directions. But I sort of do. So maybe I'm wrong to do that. But what are you holding? I noticed when I looked on the website that you guys are holding a lot of cash. But stocks did edge out cash as the largest asset class. What are you holding that just took off like that?
Yoav Sharon: Sure. So I would say I totally agree with you. One should think about volatility both up and down, kind of essentially the difference between, say, Sharpe ratio or Sortino. My original background in financial markets was as a derivatives trader and options market maker on the exchange at CBOE. So, you know, volatility is kind of embedded in my core. So I think your point is spot-on. We've historically as a fund been able to produce our returns and produce these outcomes while limiting the fund volatility to roughly half that of the broader market using the S&P as a benchmark.
Some of that is a function of the type of investments we make. Some of that is a function of, you know, having some cash or particularly hedging out certain exposures that are either unwanted or unintended. We also employ, which is one of our distinctions or unique characteristics because there's kind of two main school of thoughts in event-driven investing. One is kind of a siloed approach to say, "Someone who does merger arb," or a fund that does merger arb, "only invests in merger arb."
So when that opportunity rives up, they either have to extend on the risk spectrum or they're limited in opportunity. We employ a multi-strategy, multi-asset-class approach. So that certainly also helps with correlation and volatility. You know, if we are seeing really good opportunities and credit investments, that'll dampen volatility. Or if we see really attractive opportunities in arbitrage situations, that can dampen volatility. To kind of pull back the layers of the onion, to your question on the last year or so, we came into 2020 – we write our year-end letters and kind of outlooks and thoughts for the year on a quarterly basis. But we came into 2020 thinking that our opportunity set was pretty robust.
But we weren't overly extended in terms of risk. And I wouldn’t say we were defensive, but we were cautious to moving forward at a measured pace. And our ability to withstand the severe drawdown, that generational drawdown we saw there in Q1 – well, we did experience some of the drawdown. That was roughly a third of the broader market. And that really allowed us to capitalize on the opportunity so that it expended dramatically in the first few months of 2020. For example, risk arbitrage spreads in the beginning of February were probably trading at 1% growth spaces, implying upper-90s percent on deal closure probability.
And within a matter of weeks in March, that widened out to 20% growth spreads. And it implied probability across the universe of 60-ish %. So we were able to deploy capital given that we were insulated and sheltered from much of the drawdown. And in addition to that, SPACs were an area that opened up as an opportunity set for us as well as credit opportunities when we really saw in mid-March just indiscriminate selling of credit. So it was kind of a confluence of a few things. You know, just to summarize it or to kind of recap it, we were positioned appropriately going into the unfortunate pandemic, which allowed us to be insulated or withstand the dramatic moves.
But more importantly, then capitalize on the opportunity set as it evolved quickly. And we think that's a real benefit of the multi-strategy, multi-asset-class approach. We just view it to be more optimal than being limited to only one type of sandbox to play in, whereas, a siloed approach might be limited, we have an opportunity to really move it and really allocate capital with the opportunity set... not on an annual return basis because, you know, that's not how we think of the world. But really on a risk-adjusted basis how and where the most compelling risk-adjusted returns are, we will allocate the capital to that.
Dan Ferris: I see. You go where the opportunity is. You have a broad kind of mandate. That's really good for a fund. And it's rare too. Isn't it? Like, most people are stuck in a box, and you either want to own that industry or that asst class or whatever it is, or they're out of luck. I guess part of the broadness is just event-driven itself, right? You guys list some of the, on the little fact sheet on your website, you list some of the special situations. M&A, mergers and acquisitions. You're talking about merger arbs. Spinoffs, restructurings, complex business models as a special situation or an event. Complex business models. Tell me about that a little bit.
Yoav Sharon: Sure. Yeah. I mean, I think so as a team, we obviously have extensive experience investing particularly on the buy side as a collective over, you know, 80 years as a group. And we've amassed –cobbled together expertise in certain areas within the marketplace. So we have areas that we continually go back to. But to your point earlier, we also have a mandate that allows us to, you know, really move capital or allocate capital or learn and go into a new area when the opportunity presents itself. I think often times what happens in event-driven investing is, because – as you said – something might not fit neatly into a box, it gets pushed to the side or left to the side.
And that could be because of it's too nichey, or perhaps situational complexity where you have – let's say – a large reorganization occurring throughout a capital structure. If you're an equity-only investor, then you maybe can't see the full picture of how the value has been accrued throughout the capital structure and, more importantly where the best risk-adjusted opportunity is. And quite frankly, we also see that in risk arbitrage opportunities. Sometimes we see situations where different asset classes have wildly different implied probabilities of deal closure. And our ability to not be forced to only participate in the equity risk arbitrage allows us to recreate essentially the deal spread at a lower implied probability and, therefore, a better risk-adjusted return.
So particularly with respect to complex business situations, that generic term, I think we have a couple industries where we have a competitive advantage and we've developed frameworks and have deep expertise in order to really understand what's occurring not only from an industry level but also from a security level and how to think about when and how value will accrete to an investment idea. You know, I call out financials or changing landscape in financials as an area where we spend a lot of time or have recently. But also, health care is something that we have a consistent exposure to, particularly in the life sciences space and development-stage therapeutics.
One of my colleagues put me on the phone. Caldwell has really instilled, developed, and created a robust framework for how we assess probability of success and how we think the market consistently misprices that. Well, one thing that our fund focuses a lot on is kind of the concept of probability of success. "We want to get a lot – we want to get our events right," quote, unquote. That's important. We think over time that'll accrue value to the fund. And it has. And to couple that, when the opportunity arises to couple it with attractive skew and downside protection. And we think those two levers, getting our events right and recreating attractive skew, have a very powerful impact on not only returns but really like the return profile, the return stream of the fund.
Dan Ferris: Yeah. So I do want to talk about increasing the probability of getting the events right. Because personally, I've done a very small amount of merger arb, just sort of buying target companies. You know?
Yoav Sharon: Mm-hmm.
Dan Ferris: If there's a decent – if there's a decent spread available. Which, you know, they're often has not been. But every now and then, you find one. And I wonder. You know, I have a couple of markers that I look for that I think increase the probability. For example. I remember this company Cvent was being bought out by a private equity firm that was rolling up these event management-type companies. And so, it knew everything about them. It was the biggest event company that wasn't already private. And they had financing up the wazoo. You know, cheap financing was easy to get. So I knew that that could happen. And it just looked like kind of a no-brainer. And there was like a – I don't know – double-digit spread on it. And it worked out. It was great. But what are your markers for just like merger arb? How do you look at a merger arb and say, "You know, this merger has a much higher probability of happening. Therefore, it's worth a bet?"
Yoav Sharon: Right. No, that's precisely how we approach it. You know, whether it's a framework or a checklist. And we've developed it, and it's become more robust, and we've refined it over the years. And actually, 2020 was a really interesting test case because as an aside, what ultimately ended up being the most important thing in 2020 was actually not the strength of a definitive merge agreement or the "DMA" as its own but really the buyer willingness to proceed with the deal. Because we saw a bunch of fairly high-profile deals where the buyers have pretty significantly buyer's remorse and were either slow-playing it or essentially trying to scuttle the deal. I think when I think about the framework or the checklist of what we find attractive, you do want to find strong buyer incentives. You want the buyer to be motivated. Easier said than done, but it's really important.
We obviously go through the DMA to make sure that there's no meaningful outs and that the contract is tight. Although, as I've said previously, last year kind of proved that that is not as important potentially as many people used to think. It's also important if it's a repeat buyer or a serial buyer – someone who their deal completion reputation is important because they're going to be in the markets, again, particularly – it's a little bit of a gray area with private equity buyers or private sponsors. But if they're going to keep doing deals, they're going to want to keep coming back to the markets. They're also going to need financing. So a buyer's ability to raise the financing, the termination fee. How hefty it is. The language in the carve-outs.
You know, it's essentially a checklist that you go down and say, "OK. Based on all these attributes, what should the probability of deal closure be?" And then, obviously your downside comes into play there. But then also, how differentiated is our view of probability of deal closed, relative to the market? So on one hand, there's an absolute value component to it. You know, is a deal that's pricing a 90% probability of close in the next six weeks at a 3% growth spread, or maybe annualizing at 12%? Something like that. Is that a good value on its own, and then is it also a good value relative to what people are expecting and/or other parts of the capital structure are saying and other deals out in the marketplace?
So that's kind of – once we do the checklist and we find a deal that we think is attractive, we'll then triangulate it and get a sense of, "Do we think it’s not only attractive on a standalone basis, but how does it stack up relative to other opportunities?" And that kind of holds true for how we think about where our capital gets allocated as is. It's all done from a bottom-up standpoint. You know, fundamental research on a particular situation. But inevitably what happens is, how much capital we have allocated in one area is indicative of how those individual opportunities look, but also how that opportunity set looks relative to the other strategies or asset class opportunities we operate in.
Dan Ferris: OK. Got you. You know, I keep thinking about something as you talk about other topics that I wanted to mention for the listeners. It sounded like your answer to my sort of "volatility in both directions" question was basically, you have such a broad mandate, and so many things got so cheap in March of last year that of course you were going to be up 40%. You know? Of course it was going to be a huge gain after that. Since that doesn't normally happen, you don't normally have years like that.
And what I’m wondering now is like, if I perceive how you guys operate and if I look at the history since inception of the returns, this could be like a new higher level that you're operating from now. Because you sort of did a good job of exactly what you're trying to do – reducing volatility over the past years. And now, you got this big push up courtesy of the pandemic. And now, here you are with more assets and kind of a bigger, bigger amount of capital to work with. Period. Have I described all that right? And if so, what does that larger amount of capital mean for you? You're still not so big that you can't keep operating the same way, right? For example.
Yoav Sharon: Yeah. No. I mean, we're nowhere near a level... we have a mutual fund that's in several managed account SMAs that we manage. But we're nowhere near a level in terms of an asset level that we're anywhere close to being limited by the opportunities. Now, part of that is because we have – back to that sandbox analogy – multiple sandboxes to operate in. With respect to the volatility point that you circled back on, I mean, I would never say that. Of course, 40% is something that should be expected. You know, we think of this fund as equity-like returns with better downside protection, lower volatility, limited correlation for context. Our correlation over the last year to the S&P is roughly 0.59, just under 0.6. Our one-year beta to the S&P is 0.23.
We're really focused on idiosyncratic situations when alpha is going to drive our returns. You know? Last year, alpha accounted for something like low-80s percentage of our overall return. So it's just an entirely different game. Certainly the dramatic risk-off period in Q1 last year opened up an opportunity set that doesn't come along every quarter. But what we have seen, and 2019 was a really good example because we were also able to have a very successful year, you know, just shy of 20% with, again, a similar attribution and metrics where everything was – most of the stuff was coming from alpha, you know, protecting downside over the past four years during down months in the S&P, the fund's been able to be up.
And roughly half of those, we've outperformed the S&P by over 4,500 basis points during those periods where investors need or want it the most. You know, essentially capital preservation. Which not taking the drawdown allows you to then start compounding capital when positive returns come back to the marketplace. I think over the years, we've obviously refined our process and enhanced it. And our opportunity set has expanded because we've learned more. And maybe a theme that continually comes through in our investing approach – which kind of dovetails with volatility – is, often times we're looking for value where... you know, quote, unquote, "cheap optionality." Optionality that isn't fully appreciated in the marketplace.
Whether that be playing a risk-arb spread through the credit portion of the structure where the implied probability is much lower and the market is mispricing that optionality or whether it's... we've been investing in SPACs, as I mentioned, for probably four or five years. And a couple of years ago, it really started picking up and much has been written about and talked about what's happened over the last year. So obviously, that opportunity set has accelerated and gotten a lot more tension. But the fact that we were operating in that sandbox five years ago and were aware of it and stayed on top of it and knew it well enough to know that when the opportunity set changed, we could capitalize on it. You know, another example of an asset or a strategy opportunity set or optionality.
But also, within SPACs themselves is just embedded optionality that we've used, was being and still is being somewhat underestimated in the marketplace or even misunderstood and has been a consistent area of opportunity for the last, you know, couple of years. But I think having said all that, obviously 2020 was unprecedented on many levels, and we wrote a lot about that, just how unprecedented it was. Nearly in every sense, you know, as awful to have to go through it all. But it didn't really change our investing approach. It didn't change our process. It didn't change the core tenets of what the fund was trying to do.
And just like in the last two years, we've had outsized returns, we don’t guide to those or think that those are our right every year. I mean, we view the fund as an equity-like return. So that's, you know, mid to high single-digits on an annualized basis. But we're going to do it in a unique way with limited correlation, less volatility, and we're going to protect on the downside. And our view is that that's an attractive offering. It's an attractive offering to investors, both that are looking to get returns but then also ones that are looking to be uncorrelated. So it can work as a complement in a portfolio for an asset allocator, as a diversifier or it can also plug a hole for the return stream in an asset allocator's model.
Dan Ferris: OK. So let's talk about, you know, hedging downside risk. And let's talk about how you because you've mentioned it, and that's part of what you do if you're trying to reduce volatility, right? But on the other hand, you have to admit over the past – just call it 11 years now – it has often been a really bad idea to do that, right? It's often been a good idea to just not worry about it and not lose money on hedges. But I notice – I look through the returns since inception and three-year and five-year. And you guys have done just fine – between fine and great, frankly. How do you do it? What are you doing that is different from people who are tired of losing their ass on their hedges?
Yoav Sharon: It's a great point. So I would make one subtle distinction before I'll probably start getting a little geeky in terms of options and derivatives and thoughts on hedging, because it's kind of core to my background. But I think being hedged over the last 10 years I wouldn’t necessarily say was a bad decision. You know, it's attracted from returns. So you could say it was a bad outcome, potentially. But I think the real problem with the way folks approach hedging is, they don't have a good understanding of – A – what they're trying to hedge, how much it's actually costing, them, and what to expect when they need to hedge to work.
You know, we've always ran hedged products at Driehaus on our alternative platform. We have a good understanding of essentially – for lack of a better term, an insurance-risk budget. But also, really understanding that not everything can be hedged. When you do hedge, you want to be able to hedge cost-effectively or efficiently. You want to match your hedge to what the risks actually are. And then, you also have to understand that sometimes there are unintended or unwanted risks or even risks that you've identified that can't be hedged well or efficiently. And then, sometimes the best hedge is to reduce exposure or trim.
So I think where people get in trouble with hedging or the fatigue with hedging is not really understanding what folks are signing up for or what one is signing up for... and then also, having very little to show when there is risk-off. And part of that over the last 10 years, to your pint, has been that essentially every risk-off period has been met with as strong a risk-on period immediately after and pretty quickly. I mean, even if you think about last year, I mean, pretty wild to think that we were down 35% and had one of the largest drawdowns in the market's history, and then within a matter of six weeks we were back in a bull market and regained it all or something close to that. We consistently utilize hedging. Obviously it helps with correlation, with volatility, with downside protection.
But it's also core to what we're doing because we're so focused on idiosyncratic situations, we're so focused on the alpha in, "Getting our event right," quote, unquote that we're fine with stripping out those other exposures, those – a gain – untended or intended exposures or consequences. Because it’s not what we're trying to do. So of course, if we would not have been hedged last year, we would've made more money. But, you know, maybe we wouldn’t have been able to take advantage of the opportunity set that opened up in the first quarter as strongly or as boldly without hedges. So, you know, we pretty consistently carry hedges to areas where we have exposure and areas where we understand – ideally, we would be able to buy every investment the day before the vent happens and then exit it the day after and have no holding period, essentially.
But clearly, that’s' not how Mr. Market works. Or, you know, sometimes you don't know when the actual event's going to occur. Sometimes you don't know when the market's going to attribute the value or the value's going to accrue to the event that you're playing for. So, you know, we recognize that as we aggregate a portfolio of idiosyncratic catalysts, we're going to pick up exposures. And those are the ones that are either market exposures, asset class exposures, industries, sectors. And those are the ones that we're not only comfortable with, but that we're actively hedging out because that's not where our focus is.
Dan Ferris: Oh, I see. OK. Yep. Risk is a funny thing, isn't it? You mentioned matching the head to exactly what the risk is, I think. I forget the exact phrase used, but it was something like, "exactly what the risk is." And as soon as you said that, I'm like, "Wow." It's hard to tell kind of exactly what the risk is a lot of the time. Isn't it? I mean, risk is always the thing that you don't see coming.
Yoav Sharon: Right. Yeah. I mean, there's risks that you've identified, and then there's risks that you haven't identified. And I think what's difficult with eventually managing risk or really aligning expectations with the risks that you're trying to manage is no two scenarios are likely going to be identical, right? I mean, what happened in 2008 is not what happened in 2020, is not what happened in January with the retail trade, is not what happened earlier this week when the markets were risk-off. So it's constantly changing, but you constantly need to monitor it and assess and make sure that – obviously to the best of your ability – you are matching up the hedge with the exposures and then adapting when it seems like it's not the case or if something has changed. For example. We've been in essentially, obviously, like a 30-year bull treasury market. But since the financial crisis, I mean, QE rates have just gone down. And that's been a prolonged regime. In the last year to date, let's call it, we've seen rates rising. So, like, is that something different, or how do you approach it? You got to be constantly reassessing and readdressing your exposures and the hedges.
Dan Ferris: Yeah. I mean, I guess ultimately I just have this personal sort of pet peeve about being able to quantify risk, right? People talk about quantifying it. And it's hard. I guess, was my only point. That was probably my only point, really. And you guys seem to be doing it OK.
Yoav Sharon: I thoroughly, thoroughly agree with you. Well, we're trying. I mean, look. We're very passionate about what we do. We're very intense in what we do. You know, we kind of live and breathe this. So that helps. But I agree with you. Quantifying it, putting things neatly into models – it's not necessarily an answer, but it's just another tool in the tool kit. I think really focusing on efficiency of hedging – again, easier said than done – and really level-setting expectations I think can go a long way in aiding investors and therefore not lamenting maybe, "Oh, this hedge cost me this year," from actual returns because just the PNL isn't the whole story... from the hedging purpose. You know, maybe putting on a hedge allowed you to be potentially bigger in a position, or maybe it allowed you to go through it more confidently, or maybe it allowed you to capitalize on something else. So as you noted, there's a lot of nodes and a lot of moving parts all going into the ball. So it's kind of hard to pinpoint exactly what is attributed to what.
Dan Ferris: Right. All right. Well, yeah. It's complicated topic. We could be on it all day, right?
Yoav Sharon: Right.
Dan Ferris: So we've been actually talking a while. And I'm going to ask you my standard, final question that I ask all my guests. OK? And in your case, Yoav, what you guys do is – it's a little more technical than what we're used to discussing on the show. So I wonder if you can sort of do your best to simplify your answer. So I'm going to ask like double-duty on this answer. OK? And the question is simple. It's like, if you could leave our listener today with one thought, what would it be?
Yoav Sharon: Well, I mean, as far as a venture of investing I would say this: it's an area of the market that has a seat at the table – it has a place at the table – because of the outcomes it drives. And simply said, it's the ability to compound absolute returns, protect downside, and have uncorrelated return streams. And when you put, you know, those pillars together it's a strong offering. So I would say, you know, people who think about investing in areas of the market, this is an area that historically – and we believe going forward – will continue to be attractive.
Dan Ferris: All right. Sounds good to me. Anything to continue to be attractive sounds really good to me.
Yoav Sharon: Right. Let's hope.
Dan Ferris: That's right. Yes. Good luck, right? And I definitely – we definitely want to have you back. Hopefully, we won't see another pandemic. So we'll get to see like a more normal sort of representation of the strategy over time.
Yoav Sharon: Right.
Dan Ferris: You know, again, thanks a lot.
Yoav Sharon: Thanks for your time.
Dan Ferris: OK. So yes. That was a bit on the technical side, but I'm glad we did it. You got to know what's out there, right? If you don't know what's out there, you can't make a real decision. You can think that you're deciding between two or three alternatives, and there's like 90. You know? So we have to talk to people like Yoav who describe more complex strategies. Like, in one fund they do bond strategies driven by particular events. You know, particular catalysts. Deep-value, equity catalyst-driven trades, portfolio hedging and risk arbitrage, and probably other stuff. You know? We talked about complex capital structures.
So there's a lot in there. You know? There are probably funds out there that focus on just – I know there are funds that focus on just one of these many things that these guys have all under one roof. It's pretty cool, actually, if you just go to the website, Driehaus – I said "dry house." It's Driehaus. Driehaus.com. And then, look up the event-driven fund, which is right... you can look it up right on the front page. And they have a little fact sheet that tells you all about it. It's kind of cool just to learn about it if not invest in it. And I'm not recommending it. I'm just, you know, throwing it out there.
All right. That was very cool. Let's do the mailbag. In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticisms to [email protected] I read as many e-mails as time allows, and I respond to as many as possible. You can also give us a call at our new listener feedback line. Call us at 800-381-2357 and tell us what's on your mind. That's 800-381-2357. And indeed, our first question this week comes from our new feedback line. Our listener, Alex, called in and said this about when I discussed George Soros's theory of reflexivity. And this is what Alex had to say about it.
Recorded voice: And I took that a little bit differently than you're taking it. I took it to mean – like for example, if the Apple company's stock is going up, then that then leads to further iPhone sales, which then leads to the stock going up. I get what you're trying to say – that there is sort of a circularity there. But I don't know that that's reflexivity. I think that's... and I might be wrong, but I took it to mean that the fundamentals are improved by the stock going up. And in this case, the fundamentals would be more based on the products that they're trying to sell into the market against the competitors. Apple becomes a winning company, and their product looks better in the face of an increasing stock price, and that then helps them as they compete against Samsung, for example.
Dan Ferris: So, Alex, I think what you said – especially the example you gave of Apple, I think that's a subset of what I'm talking about. And I was trying to find a quote in The Alchemy of Finance, or Soros on Soros. I mean, Alchemy of Finance is like reflexivity for a couple hundred pages. I mean, it's got reflexivity in the stock market, reflexivity in currency markets, and then it sates the theory separately or whatever. But Soros trying to find a quote from Soros is like, you know, it's all kind of – his language is sort of complicated and circular, and it's hard to pin down a decent quote.
But I think that's the answer. I think you're a subset of what I was talking about. And I think it's mostly what I was talking about, I still think. I still think that reflexivity and turning, during a boom-bust sequence, reflexivity turns the movements in the stock price into one of the fundamentals of the company whose value is expressed in the stock price, right? It's this "feedback loop," as one of our listeners wrote in to say. And, yeah, it's like a feedback loop. But it does things like – it affects whole industries, and it does things like make, you know, it can make equity values higher and turn companies into better creditors than they might've been, for one example.
And it can allow companies to issue shares at much higher multiples, and they can acquire things like – Soros gives the example of REITs, that we're able to do that. And then, another example I know are royalty companies, like Franco-Nevada. I mean, Franco-Nevada is in a negative cost of capital-type game where they sell... I mean, a crude way of – a simplified way of putting it is, they sell shares at 25 times royalties and then pay 20 times royalties, let's just say. These days, who knows? It's probably 30 and 25. Whatever. But you get the point, right? The share price, the rise in the share price, becomes a fundamental of the industry.
And I'm going to stick with that. I really... you sound like you were challenging, but I don't think ultimately that you are. I think you're just adding a different type of example with your Apple example. But it was a good question, and it's an interesting topic. Next is Matt W. wrote in. And he says, "Thanks, Dan, for your last episode. I look forward to listening each week. Upon recommendations from Stansberry newsletters over the last few years, I have traded ETFs on occasion. After this episode, I feel like I now understand ETFs much better. I'm currently looking for a way to short zombie companies with a strong performance of the market over the last few months, it seems like this would be a great time to have an ultra-short zombie ETF."
I'm going to stop right there, Mack. I think that's a phenomenal idea. Phenomenal. You need to write into ProShares and whoever else and tell them to create the ultra-short zombie ETF. I just wanted to tell everyone about your great idea and tell you that I fully support you. I mean, if Stansberry were in that business, we should be creating a zombie ETF. Short zombie ETF. Good idea. Next comes Jeff F. And Jeff says, "Hi, Dan. Keep up the great work. Look forward to your podcast every week. Regarding Soros," he said convexity. But, Jeff, it's reflexivity. "Seems like a fancy word for watching a feedback loop, not the loop itself. Big deal. Things feed on themselves, and so they can or don't. These are the results of a system, not initial conditions." I mean, yeah. Yeah. I mean, that sounds like you basically understand it. Then he says, "bitcoin, I did not like it at all for a very long time. Electricity consumption, etc., but I kept looking at the chart. It's bullish."
And then he says, "The rise of bitcoin is due to distrust and abuse of vampire central banksters and government. bitcoin is the first thing they can't pervert because they can't manipulate the supply. This is the first currency crisis where people actually have an option. Central banks, governments are dead jerks walking. I don't store value in manipulatable things anymore. Why would I? I want a free market. I want truth. Others do too. That's why bitcoin is rising. Best, Jeff." So, Jeff, I think this is probably not the first currency crisis where people actually have an option, because they could always buy gold before, right? So I disagree with that one small point. But overall, I agree. I also think that central banks and governments are dead jerks walking. I love that expression. Thank you, Jeff.
All right. Next comes Christian K. And he says, "Hi, Dan. Question for the next podcast. I'm an Extreme Value subscriber and frequent podcast listener. Recently, it seems like I have been hearing a lot about a negative outlook for gold this year while prices of other commodities – such as copper, etc.– are forecasted to go up if/when we do see inflation rise. I am a bit confused as it was always my understanding that gold prices should rise in an inflationary environment as real rates decline. I thought that was a big part of the reason for gold's store of value attractiveness. Thanks for taking the time to read my question. Keep up the good work. Thanks, Christian K." Christian, it sounds like – first point here, it sounds like you're talking about forecast. Don't listen to the forecast. Just don't. Nobody knows the future. It makes sense that things – if you think the value of dollars is going to fall, which is what we mean by inflation, ultimately – that the value of things priced in dollars is going to rise, including gold.
Now, if you say gold has underperformed your expectations in the past year or so, I mean, I might agree with that. It did hit $2,000, I'm just going to say. But I kind of feel you on that one, because I own gold and gold-related stocks. So I'm focused on this problem as well. But I don't know. I don't think it's a permanent state of affairs. I don't. I think gold is as attractive as it's ever been for all the same reasons. What is hard to do right now is to turn your eyes and ears away from bitcoin. Because that is all that anyone wants to hear about or talk about or know about and own. So it kind of makes other things, especially assets that appear to be competing directly with it – like gold – seem less attractive. But I think it's chimerical. It's not the truth. It's just a function of this sort of bubbly moment in technology, specifically bitcoin and block chain technology. Am I saying bitcoin is in a bubble? No. Or am I? This is a tough topic for me.
I'm going to move onto the next question, and it pertains to the same thing. So maybe I'll get to keep talking about this. So this is Steve. This is our last question. Steve writes in and says, "Loved your chat with Eric Wade. So educational to frame bitcoin and block chain technology. Following up on your comments to Thematic ETFs" – he copied this link in from MarketWatch on February the 18th, and the headline is, "Bitcoin Could Hit $250,000 If U.S. Companies Opt to Do This, Says Cathie Wood." And then he says, "Blowing smoke up your own... " What he's saying there is, this headline... Cathie Wood in this article on Bloomberg said – or, on MarketWatch, sorry.
She said, "If all the corporate treasuries, all the corporations would do the same thing as Tesla and MicroStrategy and Square," and the other companies that have bought bitcoin with their corporate cash as part of the treasury, "then bitcoin would hit $250,000." And she's not wrong, probably, right? If corporations right and left started putting money into bitcoin, I'm sure it would shove the price straight up. So yeah. I agree with her. I don't know how likely it is that that'll happen, but I do think other corporations will follow suit and do it. But you're right. She is blowing – I think in the military, Steve in your question here, I think they would say you're blowing sunshine at that point. Smoke is bad. Sunshine is good, right? So Steve continues. He says, "Now a couple of questions. Paying with bitcoin. How does this work? Do you exchange bitcoin or change your bitcoin or USDC stable coin to transfer to the vendor supplier? Thinking with current volatility, how do you manage to keep the invoice value?"
Yeah. I mean, there's two questions. The mechanics are – I give you bitcoin, you give me stuff and then you probably immediately translate your bitcoin into dollars, right? And you assess the dollar value, the split second before the transaction, and you say, "This is what you're really paying." So it's really just dollars at this point. You know? And look. I'm a bitcoin supporter. I own bitcoin. I've recommended it in my newsletter. But you have to acknowledge reality, or else you're creating risk for yourself.
And the reality is, when you buy something with bitcoin what do you do? You look at the price in dollars right before you buy it. You give them that much bitcoin – right – and then they take the bitcoin. They probably just sell it for dollars. You know? So that is my real answer to your question, which the main part of that question was about the volatility and the invoice value of whatever you're buying, right? That's the only way I can see to do it. Assess the price in dollars the split second before the transaction.
Second question. No. 2, you say. "The concentration risk. Does this pose an issue? There's an article I recently read copied below." And the article says, "There are currently 11 wallets with outbound payments since 2014 holding a total of 273,182 bitcoin. As soon as one of these whales – large holders – sell their bitcoin, the price will decline firmly." And then, he continues. "Are there parallels with major shareholders in the equity market, albeit without SEC disclosure and controls? Finally... " – and then, he gives me a speaker suggestion here, which I didn't Copy into this. But the point is, is 273,182 bitcoin – if these 11 people who own this bitcoin, if they sold some significant portion of that, how meaningful would it be?
Well, look. At any moment – like if they came into the market and hit the "sell" button on 273,000 Bitcoin, yeah. Yeah. There would probably be some temporary oversupply, and the price would drop to adjust for it. But what I want to know is, is that just another dip to buy? You see what I'm saying, Steve? You got to ask out of 18 – there's 18, probably close to 19 million. I haven't kept up... I don't keep up with it every day. But it was edging pretty close toward 19 million last time I looked. So, you know, just say 19 million bitcoin out there out of an ultimate, you know, 21 million someday. Is 273,000 enough to just destroy the market? Maybe for a day or a half hour. You know, some short period of time that probably doesn’t mean anything, right?
And suppose we're going along nicely, and then that happens. Like, how many people are going to buy that dip, and how many people are going to panic and sell? You can't know that. But I just think the effect that you're describing, Steve, is probably temporary and probably long term doesn't mean a whole lot. And when you say, "Are there parallels with major shareholders in the equity market?" – well, I don't think so. Maybe just the temporary effect. Because in the equity market, a major shareholder now, if it's like the typical – if it's Fidelity or something or BlackRock, they own these things in funds, in ETFs or whatever, like, they're not there because they know the business and they've owned the shares for 30 years or something, right? They're just there because the market cap is big enough to go in one of their funds. So when they sell, eh, who cares?
But if the founding shareholder who owns, you know, 40% of the stock sells 70% of his stake, "Hey, that could mean something." But to your question, Steve, I don't think that's what... I don't think it's the same as if those 11 folks sold some portion of their bitcoin. Even some large portion of their bitcoin. It's different. They don't own a piece of a company where they're knowledgeable with the day-to-day operations or even in control of the day-to-day operations. You understand? It's different. At least, that's my take. Do with it what you will, but it's a good question. It's worth asking, and it's worth knowing about those 11 people, right? You know, you see a lot of bitcoin hit the market all of a sudden, "Well, I guess we know where it came from."
Thank you. Steve. Excellent question. That's another mailbag, and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you're listening to this episode and you really enjoyed it, first of all, thank you. Second of all, send somebody else a link to the podcast so that we can continue to grow. Anybody you know who might enjoy the show, just tell them to check it out on their podcast app or at investorhour.com.
If you want to hear more from Stansberry Research, check out americanconsequences.com/podcast. Do us a favor. Subscribe to our show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. You can follow us on Facebook and Instagram. Our handle is @InvestorHour. You can follow us on Twitter. Our handle there is @Investor_Hour. Have a guest you want me to interview? Drop me a note at [email protected] or give us a call at our new listener feedback line. Call us at 800-381-2357 and tell us what's on your mind. That's 800-381-2357. Till next week. I’m Dan Ferris. Thanks for listening.
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