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Opto Sessions

Hedge fund manager Jeff Ross’ strategy for bear markets

In this week’s episode of Opto Sessions, Jeff Ross, founder of hedge fund Vailshire Capital Management, discusses how he’s navigating the market landscape, the hedging strategies his firm is using and whether there’s further downside ahead.

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At the start of 2022, Jeff Ross, founder and managing director of Vailshire Partners and Vailshire Capital Management, had already started tilting his portfolio towards bearish market conditions.

“As the months progressed, I got increasingly bearish. I was telling people, ‘we’re going to get into a really ugly patch where the markets are going to decline precipitously and the economy is going to look extremely bad,’” he told Opto Sessions listeners, adding that he thinks this rough patch will go on for a while.

“We’re going to get into a really ugly patch where the markets are going to decline precipitously and the economy is going to look extremely bad” - Jeff Ross

While Ross describes himself as a “natural optimist”, he reveals that this has been the most bearish he’s ever been, citing the economic slowdown, sticky inflation and the likelihood of a Federal Reserve-induced recession as reasons for the negative tilt.

At Vailshire Capital Management, the firm uses an innovative all-weather (long/short) full-cycle portfolio management strategy for its clients. The approach aims to achieve the highest possible portfolio returns, whatever the macro conditions.

Using this risk-balanced strategy, the firm took advantage of the bear market relief rally that followed the end of the second quarter by taking out short positions. “[The markets] got oversold for a bit, but we’re sort of nearing the peak,” Ross explained during the call on 18 July.  

From a macroeconomic standpoint, he remains bearish in his outlook — “it’s going to get worse before it gets better”. On 20 July, the S&P 500 closed at 3,959.90. “I think we’re going back down to 3000 and maybe sub-3,000. There’s so much more pain to come. Hopefully, I’m wrong, but I don’t see any reason why equities should improve or rebound based on the macroeconomic situation: GDP around the world, the persistence of Covid-19 in Asia, the Russia-Ukraine war, all those kinds of things.”

Indicators to watch when timing the bottom

The main indicator that Ross is watching is oil prices. “[Oil prices have] come down about 20% from its highs. I’m waiting for it to pull another late 2008 and drop off a cliff to the $70 or $80 a barrel level. But it’s kind of hanging in there. It’s [trading at] around $100 — one on one a barrel. As long as that remains high that holds inflation up,” he considered.

The hedge fund manager says that he wants oil prices to drop. “Businesses all around the world and the economy still move on oil, like it or not,” he said, adding that “high prices are the cure for high prices for oil”. Ross expects that once businesses start to shut down and the transportation industry starts to wind down operations, oil prices will drop precipitously.

Another indicator that he’s watching is the dollar. “The dollar is like a wrecking ball. It just crushes all risk assets,” he said, referring to the US Dollar Index’s [DXY] “monstrous year”.

“When people sell their risk assets out of fear, what they’re doing is buying the dollar. That adds to the increased liquidity of the dollar, which adds to dollar strength. I think that will continue. We’ll know we’re in the later stages of a recession as we see the dollar continue to strengthen against everything else.”

For more ways to listen:

Apple Podcasts

Spotify

Stitcher

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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.

 

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