A Newport Beach investment firm has emerged as a superstar amidst the pandemic that broke out in February and March.
LongTail Alpha LLC on Feb. 1 started OneTail Hedgehog Fund II, which returned a startling 400% during that two-month period, a time when the S&P 500 Index dropped 20%.
LongTail’s other fund, TwoTail Alpha Offshore Fund, returned 45% in the first quarter.
“We are ensuring against declines in the stock market,” founder Vineer Bhansali told the Business Journal. “It’s a protection strategy—I hate to use to the word insurance.”
Assets at the Newport Center-area firm quadrupled in the first quarter to $381 million, mostly as a result of appreciation, Bhansali said. However, the AUM wasn’t enough to make the top 30 firms for the Business Journal’s annual directory of registered investment advisers (see page 28).
The firm, even with a relatively low amount of assets, caught the notice of Wall Street, which has been calling a lot in recent weeks, he said.
Bond King Plaudits
Bhansali is a 16-year veteran of Newport Center neighbor giant Pacific Investment Management Co., where he spent a decade in charge of Pimco’s analytics from 2000 to 2010, including designing its “tail-risk management program” to minimize downturns in bad markets.
“Vineer was especially helpful during the 2008 financial crisis for his work in researching and implementing hedges in the credit default swap markets, and risk analysis for broad Pimco portfolios,” said Pimco co-founder Bill Gross, who became known in financial circles as the Bond King.
Pimco’s success during the 2008 crisis boosted its asset to more than $2 trillion, helping it become one of the world’s biggest money management firms.
“Vineer’s work at Pimco was important for his quantitative and analytics research, as well as his help with me overseeing various funds, including ETFs,” Gross added.
Vegetarian Burger Cooker
Bhansali, who grew up in India, arrived in the U.S. at age 18 to attend Caltech. As a student without money, the only job he could get was flipping hamburgers, which was problematic.
“I was a vegetarian,” he said. “I was told I only had to flip them, not eat them.”
After earning M.S. and B.S. degrees in physics from Caltech in 1987, he received a Ph.D. in theoretical physics from Harvard University in 1992.
He had no intention of working in finance when Goldman Sachs offered him an opportunity.
“I thought it would be a good sabbatical,” he recalled. “I didn’t go back to physics.”
While he had no knowledge about financial markets, he said his degrees helped him price options.
“Every physics undergrad knows the mathematics of finance better” than anyone else on Wall Street, he said.
He has kept his hand in physics by publishing about 25 peer-reviewed papers. His fondness for CalTech remains as he has endowed prizes in honor of his grandparents to reward its students.
Wall Street
He’s worked for who’s who of Wall Street such as Citibank, where he founded and managed the Exotic and Hybrid Options Trading Desk and Salomon Brothers in its Fixed Income Arbitrage Group.
His tenure at Pimco included eight years as a managing director and head of the Quantitative Portfolios Team, which he founded in 2008. He managed accounts and funds with up to $50 billion in assets.
Bhansali said he left Pimco around the time there “was a lot of noise” surrounding the then infamous 2014 departure of Gross, whom he calls a good friend.
In 2015 when Bhansali began his firm, he chose the name LongTail because it describes his strategy where the left side is for the downside of the market and the right side is on the upside.
“We specialize in unpredictable events that are long tail,” he said. “We actively try to do the things that not everyone else does.
“It ensures against severe selloffs in the markets,” he said. “In typical years when the markets go upwards, these strategies lose money. You can think of this as an intelligent way to buy put options.”
He said his puts are like credit default swaps, which made some investors like John Paulson fabulously rich by shorting the housing market in the 2007-08 financial crisis. Bhansali said he doesn’t anticipate reaping those levels of returns.
The pandemic was the fifth financial crisis he has been through since 1994.
“Every seven to 10 years, this happens. Anticipating this outcome, you don’t have to be particularly smart. You just need to know it goes in cycles.”
The Disease Spread
While he first became aware of the coronavirus last December, he didn’t think much of it. He wrote a column for Forbes where true to his investment style, he warned “that something would happen in the market.”
“I accidentally used the language of the spread of the disease, which became obvious very quickly after I wrote it,” he said. “The markets were vulnerable to begin with. Even at that point, I didn’t think it would be as significant as it was.”
In the first quarter, he used options, which are priced cheaper than the stocks, to manage more than $10 billion.
His clients include institutional investors like the California Public Employees Retirement System, America’s largest pension fund.
It received a payout of several hundred million dollars at the end of March from LongTail, Bloomberg said, citing unidentified people with knowledge of the matter.
“Our clients are extremely pleased,” he said.
Q2
The second quarter has gone “extremely well.”
“We have the right tail strategy—we’re betting on a rebound,” he said.
When asked where he’s putting his money now, he pointed to tech stocks because more people are working out of their homes, as well as airlines and energy stocks because they’ve been beaten down so much.
He might tap into commodities like gold as a hedge against potential inflation.
“The Federal Reserve is printing so much money that people will look for safe places for cash,” he said.
He also knows where he doesn’t want to invest—bonds because of “very low yields,” and small caps that are dependent on governments for when to open.
“We’re seeing a significant divorce between financial markets and the real economy global—highest unemployment rate in the last 70 years. People are psychologically damaged.”
Nonetheless, in the long term, he’s bullish on the U.S. economy and Orange County in particular.
“I’m very optimistic. When the rebound happens, it will be very quick. If people have risk capital and want to invest in America, this is the time to do it.
“Orange County is a great county to work in. Businesses here will thrive. Orange County will lead the way back.”
