Crashbusters: These Guys Sell Insurance Against Bear Markets

You can buy the security of a stock or bond portfolio. It won’t be free.


Sat the end of 2020. Paul Kim, a middle-aged father of three, with a suburban home and a secure job at a Midwestern insurance company, does something crazy. He quit that job to start his own company.

“It’s one thing to jump at the start of a bull market,” he recalls, now in a safe place. “But people were shocked. The market was tough. It looked like depression and a medical problem.”

In fact, the time was not crazy. Kim’s business, Simplify Asset Management, sells mutual funds that protect portfolios from risks such as stock market crashes and rising interest rates. The best time to sell such things is when the world is falling. As soon as the outbreak started, Kim insisted that either he would start a company then or he wouldn’t and he would go to his grave with regrets.

In the year it took him to break the bank’s record, the stock market recovered. If the halcyon days had returned safely, the new project would have been completed. But the happy times for the bulls didn’t last long. For Kim, Providence arrived this year in the form of a simultaneous rebound in stock and bond prices.

The double dip shocked investors who had been led to believe that bonds could offset the risks of stocks. They were eager for some kind of risk reduction. This is what Simplify sells.

One of Kim’s funds, the Simplify Interest Rate Hedge ETF, makes money when bonds go down. It is up 50% this year (as of July 20). Some of his investments, which include stocks and a bit of insurance against bear markets, have fallen this year by half of the stock market. Simplify has raised $1.4 billion to create 21 funds, each offering risk and reward strategies, in stocks, bonds, stocks and cryptocurrency.

Kim’s co-founder and major shareholder in the game is David Berns, trained as a scientist. Like Kim, Berns is a fugitive from the insurance business. But they have different career paths. Kim, 45, has an Ivy League undergrad (Dartmouth) and a Wharton MBA that you would expect to become a sales manager at Pimco and then Principal Financial Group. Berns, 43, is the son of two New York City police officers and says he would have joined the military if his mother had insisted that he apply to one college, Tufts.


“If you avoid big losses with a strong defense, the wins will have a chance to take care of themselves.”

—Charles Ellis


Berns received a degree from Tufts and, in 2008, a Ph.D. in physics from MIT. His thesis was to use superconducting circuits to achieve the same output as a transistor. Students in the class took on projects to research quantum computers, devices that could one day overcome math problems beyond the reach of conventional machines. Berns turned to the concept of history building.

Physics, money – is there a connection? There is. The spread of temperature over time, for example, is similar to the spread of commodity prices. Putting his research into practical terms, Berns explains that it’s all about risk and how people perceive it.

Kim and Berns were in danger when they started a company without an angel to help them. Maybe Kim was trying to prove something. He came to the US when he was 4. His parents, now retired, started with a fruit stand in Queens, New York, and eventually built a wholesale business. If they could succeed as businessmen, of course they would. He says of his work starting ETFs at Pimco: “When you build a $20 billion platform, what do you have? You don’t own it. It’s just a project.”


The Vault

DOLLARS DOWN

Even the Great Depression was a time of success—for the few who had the opportunity to profit from the stock market. Take Floyd B. Odlum, the “quiet, portly, sandy-haired financier” who attended a bull run in 1929, predicted a crash, then raised $100 million ($2.3 billion in today’s dollars) to capitalize on the stock market. money. dollar after Black Tuesday.

If you wanted to drive $1,500 to $10,000 over the past four years, you could have done what Odlum did. He alone started with $15,000,000 and now controls $100,000,000! They believe in spreading risk in different ways; His portfolio includes banking; useful; retail stores; farm machinery, petroleum, biscuit,

shoe and car companies. “But,” he says, “in times like these you have to do something instead of just being on the to-do list.” When the trust’s shares were falling on the street as low as 50 percent of their true value, it was not difficult for a skilled negotiator like Odlum to buy control quietly. —Forbes, July 15, 1933


The couple raised enough money from family and friends to get the business off the ground. At half a billion worth of assets he had enough credibility to land outside of the money. Billionaire Kim is not known to have raised $10 million at a rate of 25%.

The hedge fund, which has $296 million, has a large portion of its bets against Treasury bonds. It has out-of-pocket options that cost money if, six years from now, 20-year Treasurys are paying more than they are now.

Prices do not have to exceed where the options are for the options to be valuable. When interest rates rise, as they have this year, long-term investments are more likely to pay off, and increase in value.

Simplify doesn’t mean that hedge fund value is the only way to make money. It’s like fire insurance. Hold some of it alongside traditional fixed assets, such as a portfolio of long-term municipal bonds, and holding onto those assets through bull and bear markets is acceptable.

Another option is the Simplify Hedged Equity ETF. These have the ability to trade in markets that have already been added to the S&P 500 portfolio they were designed to protect. The merger aims to challenge the traditional representation of pension funds, a 60/40 mix of stocks and bonds. So far this year, with the S&P down 16% and the overall bond market down 10%, Silify’s offering looks good. Hedged Equity is down 8%; Vanguard Balanced Index Fund is down 15%.

Investors have a negative perception of risk, says Berns, and have a position they may not have in the capital markets. Their mentors don’t always prepare them. Yes, he adds, “Wall Street people work hard to hide the risks of their products.”

One reason for this is the global tendency to measure risk with a single number, the month-to-month difference in the stock price. The difference adds up squares about the distance the stock price moves from its starting point. Berns cares about cubes. Arcane? Not at all. Focus only on the difference, and you will like the strategy that combines small gains with large temporary losses.

This is what you get, for example, in a junk bond fund or a fund that increases monthly income by writing call options. Products like this are sold because they trick investors into thinking they can take less risk and make more money at the same time.


HOW TO PLAY

By William Baldwin

Removing risk from the portfolio? It’s not possible, unless you take out a refund (Treasury funds are not indexed to inflation). You can, however, ease the pain of a bear market. The Company Overview Simplify Interest Rate Hedge ETF (ticker: PFIX; earnings ratio: 0.5%) is a painkiller, this year it is rising not five times as fast as the rest of the market fell. The $10,000 level should reduce the damage caused by inflation to the value of $100,000 in the entire bond market fund. If interest rates go back down, PFIX will be a loser, but it can be a good problem to have, because your main bond fund is doing well.

William Baldwin is Forbes’ Investment Strategies columnist.


Calculations with cubes, which calculators call “skewness,” put a red flag on such methods. It favors the mirror image of return patterns: many small sacrifices in return for occasional large gains. What you get is what you get in the $449 million Simplify US Equity Plus Downside Convexity ETF, which has exposure that doesn’t do much in the way of corrections, as stocks have been this year, but could be very high. damage. That model is suitable for some investors, who can handle a 20% decline but not a 50% decline.

Berns says: “We carve sculptures to distribute. Decisions are a scalpel.”

Simplify’s ETFs cost more than traditional funds but less than individual funds that offer customized returns. The cost hedge ETF has a 0.5% annual fee; hedged equity fund, 0.53%; convexity fund, 0.28%.

“ETFs are a good mousetrap [than a hedge fund],” says Kim. “They are cheap. It is very transparent. It is very tax free.

Kim’s 23-employee company was not in the black, but he hopes it will be soon. “ETFs are like a movie studio,” he says. “You’re looking for a blockbuster to help the business.” They won’t pray for a catastrophic bear market in stocks or bonds, worse than we’ve had, but such an event could provide a blockbuster.

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