Parplus Impersonates LTCM, Drags Ronin Down

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Parplus Impersonates LTCM, Drags Ronin Down


Knowing is not enough; we must apply. Willing is not enough; we must do.” – Johann Wolfgang von Goethe

With a name like Parplus, it’s difficult not to take the bait. Not quite as fruitful as Lev Parnas’ company, Fraud Guarantee, but ripe nonetheless, given the circumstances…

For instance, we may never know if the advice – as recounted by Carl Spackler – of the Dalai Lama ever entered Jim Carney’s mind: Gunga galunga. And, we may never know for sure whether the Parplus crew received total consciousness as the reality of the situation became clear. In fact, we may never know – as the Arnold Palmer story goes – what par actually was for this hole…

But, one thing’s for sure: It all happened fast…

Here’s the setup:

Seeking to satisfy some of the hunger for yield enhancement solutions (and, ideally, some downside protection) – typically offered of late in the form of structured notes, “smart beta” products, and other clever overlay strategies – Parplus Partners was established in 2016 and indirectly owned by James W. Carney, Addison M. Sollog and Ronin Private Investments, LLC. The Parplus Equity Fund was established shortly thereafter.

Here’s how some of the bio material reads:

“In 2009, James (Carney) formed his own trading group in partnership with Ronin Capital LLC, one of the Midwest’s leading proprietary trading houses.  It was over a six-year period with Ronin that James developed and successfully implemented the strategy applied in the Parplus Equity Fund, which he launched in May 2017.”

The basic idea was to beat the “market” by 400-500 bps (net), or whatever was enough to attract capital and get paid – you knowfor the effort

In this case, the market – or, “par” in Parplus – was the S&P 500 index, and therefore, the bulk of exposure would be to the SPDR S&P 500 ETF, or SPY. Five quarters of 13F reports bear this out (and corroborate much of the related strategy descriptions and AUM figures), see below:

Note, while we’re on it, that it isn’t until the most recent 13F filing, from Q4 2019, that Parplus displays more than one position (long SPY) from the 13F securities universe, which does not include certain options (i.e. – VIX options) nor futures. In that disclosure, there are 151 positions, 150 of which are comprised of 118 stocks, 14 straddles (without associated long stock), an orphaned put, and 3 additional ETFs, including a very small position in Vanguard’s version of their SPY ETF (which, btw, seems redundant, if not silly, but – all of which – may be an indication of strategy capacity constraints emerging, as will be implied below)…

Anyway, the latest Form ADV (part 2A – firm brochure), dated March 29, 2019, describes the strategy like this:

“Parplus Partners seeks to provide investors with returns similar to the performance of the relevant Benchmark(s) during rallying market periods, and augment portfolio return with certain alternative investment strategies that are intended to outperform during periods of volatility and declining markets. Parplus Partners will attempt to achieve this investment objective by: (i) maintaining an 100% long diversified equity portfolio that is constructed to attempt to yield broad-based market returns similar to the performance of the relevant, class-specific Benchmark (e.g., where the relevant Benchmark is the S&P 500® Index, this could include a portfolio composed of ETF shares in the SPDR® S&P 500® ETF Trust, a basket of component stocks of the S&P 500® Index and/or such other investment exposure that will yield broad based market returns resembling that of the S&P 500® Index); and (ii) generally using the long equity positions as collateral, pursuing a wide range of alternative investment strategies to attempt to generate additional portfolio return.”

As is common with hedge fund and other alternative investment documentation, the “wide range of alternative investment strategies used to generate additional portfolio return” included basically anything and the kitchen sink. The manager – Parplus – is legally authorized to engage in whatever overlay strategy he deems fit…

As of December 31, 2018, AUM was listed at $118 million, which matches the 13F data for Q4 2018. So, if you’re still following along at home, it looks like Parplus’ AUM was roughly $510 million as of December 31, 2019 – growth of nearly $400 million in a single year.

Here’s what happened to put an end to this run, in a nutshell:

The overlay – the “plus” in Parplus – is believed to have been variance swaps comprised of strips of short VIX options (at the CBOE) against long SPX futures (at the CME). Now, under normal market conditions – and even anticipating volatility spikes up to, say, 40 or so – this spread strategy can work quite well. Clearly, something was going right to grow AUM from $118 million to north of $500 million in a single year.

However, when we consider the convergence of factors, and the “six sigma”-type move in this spread that occurred, Parplus ends up as a bag of broken sticks:

  1. (Too) fast growth in AUM relative to strategy capacity, when under market stress;
  2. An incentive fee-only compensation mechanism – as detailed in a March 27 Institutional Investor piece, “A Hedge Fund CEO Bragged About Not Taking Management Fees” – that may have warped risk incentives;
  3. Unprecedented volatility of volatility, as detailed in our Feed post, “Marketquake: The Volatility of Volatility” (including the chart below, as refresher); and,
  4. Both CBOE and CME floors being closed on the dates that the margin call sirens were going off, thereby limiting a human being from putting any tourniquet on the bleeding…

All of these factors – and likely others – converged to widen a spread beyond anyone’s expectations, causing Parplus’ futures, options and collateral value to evaporate. Furthermore, given’s Ronin’s stake in Parplus, the CME and ABN AMRO Clearing came after them, too… And, if ABN’s loss is $200 million net, that likely means that the total loss is ~$700 million (given Parplus’ most recent AUM).

This scenario is very similar to the collapse of Long Term Capital Management (LTCM) in 1998.  The rates spreads that took them down in the aftermath of the 1997 Asian and 1998 Russian financial crises eventually came back; except only after a consortium of 14 banks covered the margin call – and enjoyed the value of the mean reversion. Chances are, there are a couple large prop firms – that CME quietly called on March 20 to auction Parplus’ positions – who are beginning to enjoy a similar mean reversion…

One more thing:

As always, I am not here to dance on graves, be overly sensationalistic or make light of anyone’s hardship – even in cases where I have limited sympathies. This work, as mildly entertaining as it may be by accident, is intended to inform and educate; to solve puzzles. If there are errors, send confidential notes to feedback@alphacution.com, and I will made amendments or corrections to the content, as necessary.

Until next time, stay safe out there…

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