by Jeff Miller, A Dash of Insight
A seriously flawed story about George Soros got a lot of media coverage end of last week. In the midst of options expiration and breaking news from Ukraine, this story might not seem very important. But it was big enough to earn a play from all of the major news sources and a feature on CNBC.
I am not going to list all of the errors. If anyone had exposed the problem they would be in line for my Silver Bullet award! Instead, everyone seems to have lamely tagged along with some anonymous sources. I hope no investors traded on this “information.”
The Basic Claim
The news story was that George Soros, one of the most successful investors in history, had made a big bet on the market moving lower. That the bet was much larger than in past filings (up over 600%!!). That what he had risked was the equivalent of 17% of his fund. Etc.
None of these claims can be supported from the actual filing. Here are the problems. Those that should be obvious to anyone:
- The information need not be filed for 45 days. In the era of high frequency trading, this is ancient history.
- There is no way to determine whether the positions are hedges against other holdings, nor to evaluate the relative size.
These items might require an options professional, but there are plenty of them around who would be happy to comment:
- The reports are based upon “notional value.” This is a calculation of the number of option contracts multiplied by 100 and by the value of the underlying security.
- The notional value does not represent how much was spent on the option, so using it to show the percentage of the portfolio invested is completely inaccurate.
- The report does not show which strike price was used. If buying puts, you could buy some that were 10% or more out of the money (tail risk?) and the notional value would be the same as if you bought puts that were deep in the money.
- Put another way, the report does not show the “delta” of the options – how much the options change in price given a change in the underlying security.
- The 13F filing does not require disclosure of short positions, including short puts. Short puts are actually a long position, so you can see the confusion. The reported options could be part of a complex spread – and probably are. The spread might not even represent short deltas. We simply do not know.
To summarize: Soros might have a boatload of cheap tail risk puts. He might have a put spread, including one that might actually lean long. He could have some kind of volatility play, since he reports both long calls and puts. He might have taken the entire position off weeks ago.
Do we really care about this? You probably should not be influenced by George Soros’s position from 45 days ago, but it gets played as a big story.
What has gone wrong?
Our news sources completely failed on this story. What went wrong?
Budget cuts? Summer vacations? A shorter news cycle?
Whatever the reason, the mainstream media sources are rushing to publish questionable information and conclusions. I suppose there are a few investors out there who made a decision based upon what George Soros was doing. Some sources said this was evidence that “the big one” was at hand.
And of course, the government is no help. The required filings are well-intentioned, but do not provide even the most basic information required to discern the actual position of these managers.
I always try to make a constructive suggestion. Requiring the actual holdings – strike prices, both long and short – would allow readers of the filing to evaluate the position as of the stated date. That is the best the government can do. Trying to put a number on the position value is a moving target that changes with time and price. Leaving out the short positions turns the exercise into a joke.
Misleading information is worse than nothing at all!