THE brutality of the stock market sell-off as a result of Covid-19 pandemic has been so extreme and rare in its breadth and velocity that not many would venture into the market, if not to take profit or cut losses.
Yet, some relatively more sophisticated trading representatives as well as hedge funds have been making use of various market tools and products to reap handsome returns for their clients; for the less-sophisticated, short-selling has worked too.
Marcus Toh, a trading representative at Phillip Securities, shared that he has been using daily leverage certificates (DLCs) to fight the heightened market uncertainty.
DLCs allow Specified Investment Products (SIP)-qualified investors the ability to take long or short positions with leverage, on the daily performance of the underlying stocks.
"DLCs have been very useful for my clients and me in the current market. We've been trading the 5 times long and short DLCs on the Straits Times Index stocks to capture the short-term swings," Mr Toh told The Business Times.
He added: "I made close to S$20,000 trading the DLCs a couple of weeks ago, with the biggest wins from the 5 times long DLCs on CapitaLand, DBS and Keppel Corp."
That day was Friday, March 13, Singapore's stock market started to rally in the afternoon, and Mr Toh jumped in.
"I bought into various index-linked DLC products. Those stocks did rally substantially, and I was able to make money," he noted.
Mr Toh believes that these are "good additional instruments that clients can utilise to either protect their portfolio or make money from the current market".
"For clients with portfolios of stocks and do not wish to sell out their key index stocks, sometimes to hedge against it, we may buy a short DLC just to hedge against losses," he explained. "DLC is good for retail investors because right now, a number of DLC products on selected index counters are attractively priced."
Elaborating, Mr Toh said: "Not a lot of people can afford to buy S$16,000 worth of DBS shares. But they can afford to spend S$2,000 to buy a DLC on DBS where if DBS share goes up by one per cent, the DLC goes up by 5 per cent. So, the exposure is good."
Similarly, Valerie Zhou, a trading representative at UOB Kay Hian, said: "I like that DLC allows traders to capture short-term market trends with 5 times leverage and ride on the current market volatility."
Ms Zhou tells her clients that with a comprehensive stop loss strategy, DLCs can be highly profitable if traders can manage their risk and portfolio size well. "My most profitable intraday trade was on the 5 times long Tencent DLC with an S$11,000 profit."
In February, Danny Yong's Dymon Asia Macro hedge fund gained 20 per cent and is now up more than 20 per cent this year. It has profited from bets on rising bonds and falling stocks, as well as wagering against the currencies of export-dependent countries.
Mr Yong told The Financial Times that he was positioned for a sell-off in risk assets and expects the S&P 500 - which has already dropped from more than 3,300 to around 2,750 - to fall to 2,580 in the coming weeks.
"The US will be hit hard, and will shockingly be the least prepared among the developed economies," he said. He expects "significant global supply chain disruption" and a "destruction" of demand as people have to stay at home because of the virus.
Mr Yong also feels that monetary stimulus will have little impact in stimulating economic growth.
"When people fear for their lives, even if interest rates are negative, or cash handouts were given, it will take a while before they build the confidence to leave their homes to start spending again," he added.
Globally, a handful of hedge funds betting on bonds or volatility have reaped profits from the turbulence. FT reported that one of the biggest gains came from Roy Niederhoffer's New York-based computer-driven hedge fund firm.
RG Niederhoffer Capital Management's flagship diversified fund - one of the world's oldest quant hedge funds - has gained 37 per cent this year, after losing 28 per cent in 2019 when markets rose.
Mr Niederhoffer's fund tries to calculate when markets have become too fearful or too greedy and then buy futures in bonds, stocks and other assets to profit as they correct.
US short-sellers profited nearly US$344 billion from the market's Feb 19 peak to March 19, according to financial analytics firm S3 Partners.
In an interview with BT last week, Michael Syn, SGX's head of equities and derivatives, said the exchange has seen high activity levels from individual traders, regional and international brokers as well as institutional risk managers.
"Individual traders have demonstrated particular affinity for DLCs, which offer leveraged returns in 'swing trading' as well as protection through an 'airbag feature'," Mr Syn said.
Turnover for DLCs has risen three times compared to last year. It has also witnessed 50 per cent more active participants as well as active engagement and feedback from DLC clients, including SGX trading representatives.
"All of our broking members in both securities and derivatives have been busily employed with client activity in the markets," Mr Syn said, adding: "Interactive Brokers, one of the most prominent technological broking platforms in Asia, both securities and derivatives, is very satisfied with our shelf of products and our market operations servicing their business."
Professional trading and arbitrage firms have been interacting intensely with SGX derivatives marketplace, especially when arbitraging between different securities and derivatives across Asia, which helps to keep the market moving in economic synchrony and orderly and active price discovery, he noted.
"Legend Arbitrage has been busy trading a multi-asset book of exposures across the Asian markets, particularly between China markets and SGX's unique products of China assets (China A50, iron ore, CNH)," Mr Syn shared.
So, is it too late?
According to Phillip Securities' Mr Toh, the three local banks - DBS, UOB and OCBC - which are trading below their book values, offer attractive proposition for retail investors.
"Of course, the next concern now is if the economy is going to turn around when there is a cure to Covid-19, then the DLC long is also an excellent product for us to invest heavily in and profit from," Mr Toh said. "Using such instruments, you can benefit from daily fluctuations. You just have to take a view. That's most important."