Here’s WSJ with more on how Wall Street is preparing to profit from an unwind in Main Street’s ETF and mutual fund portfolios:
Wall Street is preparing for panic on Main Street.
Hedge funds are lining up to profit from potential trouble at some “alternative” mutual funds and bond exchange-traded funds that have boomed in popularity among retirees and other individual investors.
Financial advisers have pushed ordinary investors into those funds in search of higher returns, a strategy that has come into favor as Federal Reserve benchmark interest rates remain near zero. But many on Wall Street worry the junk bonds, bank loans and esoteric investments held by some of those funds will be extremely hard to sell if the market turns, leaving prices pummeled in a rush for the exits.
Concerns about such scenarios have been escalating for some time. Now, investment firms such as Leon Black’s Apollo Global Management LLC and Oaktree Capital Management LP are laying the groundwork to cash in if they come to pass.
Apollo has been raising money from wealthy investors and portfolio managers for a hedge fund that snaps up insurance-like contracts called credit-default swaps that benefit if the junk bonds fall. In marketing materials reviewed by The Wall Street Journal, Apollo predicted: “ETFs and similar vehicles increase ease of access to the high yield market, leading to the potential for a quick ‘hot money’ exit.”
Guided by a similar outlook, Reef Road Capital Management LLC, led by former J.P. Morgan Chase & Co. proprietary trader Eric Rosen, has been betting against, or shorting, exchange-traded funds that hold junk bonds and buying options that will pay off if the value of these high-yield securities falls.
The hedge funds are taking aim at what is regarded by many on Wall Street as a weak spot in the markets. “Liquid-alternative”” funds have emerged as one of the hottest products in finance, fueled by a promise to deliver hedge-fund-style investing to the masses. They use many of the same strategies as hedge funds, with wagers both on and against markets, but are open to less-wealthy investors with fees closer to mutual-fund standards.