Multi-Billion Levered Options Strategy Fund Finally Faces The Music For Fraud

Multi-Billion Levered Options Strategy Fund Finally Faces The Music For Fraud

Three years ago, we first introduced the world to Catalyst Capital, and its Hedged Futures Strategy Fund, which wasn’t a managed futures fund after all…

“It was miscategorized,” said Morningstar (MORN) analyst Jason Kephart, noting that Morningstar analysts don’t cover the fund. The Catalyst fund uses put and call options on Standard & Poor’s 500 stock futures, with the aim of reducing volatilty and overall correlation to the blue-chip index.

Morningstar moved the fund into the options writing category Feb. 1, Mr. Kephart said.

For many, it was the first time they had seen the power of ‘short gamma’ to create a massive market melt-up in practice as at the time, chatter about a multi-billion-dollar levered options strategy fund getting caught offside (and being forced – by its own strategy’s hedging requirements – to buy into the rally, acting as the ‘catalyst’ for the almost unprecedented move) had been rife.

Catalyst Capital CEO Jerry Szilagyi told Bloomberg in Feb 2017:

“It’s just people looking to sensationalize things and make headlines,” adding that “our exposure was greatly exaggerated, and our impact on the market was greatly exaggerated.

Which rang a bell to more than a few…

Bear Stearns CEO Alan Schwartz goes on CNBC in March 2008 and assures viewers that the firm has ample liquidity. “Part of the problem is that when speculation starts in a market that has a lot of emotion in it,” Schwartz says he has numbers to back up his insistence that the bank’s position is solid.

As we mocked at the time, the first rule of crisis management… “blame the speculators”