Key Takeaways
- • Hedge fund manager Bobby Jain, CEO and CIO of Jain Global, warned in a Bloomberg Businessweek interview released November 13 that "liquidity, concentration, leverage are three things you can't put together."
- • The Direxion Daily Semiconductor Bull 3X ETF (SOXL) fell 48.63% from its October 13 close of $127.57 to $65.53 on November 12, and fell a further 17.69% to $53.94 on Friday morning.
- • U.S. leveraged ETFs took in a record $9.5 billion in the week ending October 16, and SOXL pulled in $5.1 billion in the week before November 10, its second-largest weekly haul ever.
- • SOXL resets leverage daily, so its 3x target can erode over weeks through volatility decay; the fund was down 30.04% from its October 16 price of $93.67 to the November 12 close.
- • As of July 31, SOXL held $19.44 billion in net assets, with NVIDIA, AMD and Broadcom as its largest positions at 5.99%, 5.82% and 5.49% of net assets.
Summary
Hedge fund manager Bobby Jain, CEO and chief investment officer of Jain Global, cautioned in a Bloomberg Businessweek interview released Friday, November 13, that liquidity, concentration and leverage should not be combined in one portfolio. Jain, who built Jain Global from scratch after careers at Credit Suisse and Millennium, defended leverage at large hedge funds, saying "if you have to use leverage, these firms are the most responsible users," and citing strong capital structures and prime broker relationships. He never addressed retail investors or leveraged ETFs, according to the article.
The warning came as retail investors were concentrating exactly those three risks in one product. According to Goldman Sachs data cited in the article, U.S. leveraged ETFs collected about $13 billion in October, with a record $9.5 billion inflow in the week ending October 16. The Direxion Daily Semiconductor Bull 3X ETF (SOXL) drew $5.1 billion in the week before November 10, per The Kobeissi Letter, its second-largest weekly haul ever.
SOXL fell 48.63% from its October 13 close of $127.57 to $65.53 on November 12, and was down a further 17.69% at $53.94 on Friday morning. The article attributes the damage partly to the fund's structure. It holds only semiconductor stocks, with NVIDIA, AMD and Broadcom as its largest positions as of July 31. It targets 3x the daily move of its chip index and resets that leverage each day, so compounding can leave it well below 3x the index's return over weeks or months, a effect traders call volatility decay. Hedgeye said on November 10 that the fund was down 81% from its cycle peak.
The fund remains volatile in both directions. Even after Friday's drop, SOXL was up 31.98% from its $40.87 close on November 5 and up 28.42% year to date, but down 12.22% over five years. The article notes that upcoming weekly flow data will show whether retail investors kept buying the dip or began withdrawing.
The warning came as retail investors were concentrating exactly those three risks in one product. According to Goldman Sachs data cited in the article, U.S. leveraged ETFs collected about $13 billion in October, with a record $9.5 billion inflow in the week ending October 16. The Direxion Daily Semiconductor Bull 3X ETF (SOXL) drew $5.1 billion in the week before November 10, per The Kobeissi Letter, its second-largest weekly haul ever.
SOXL fell 48.63% from its October 13 close of $127.57 to $65.53 on November 12, and was down a further 17.69% at $53.94 on Friday morning. The article attributes the damage partly to the fund's structure. It holds only semiconductor stocks, with NVIDIA, AMD and Broadcom as its largest positions as of July 31. It targets 3x the daily move of its chip index and resets that leverage each day, so compounding can leave it well below 3x the index's return over weeks or months, a effect traders call volatility decay. Hedgeye said on November 10 that the fund was down 81% from its cycle peak.
The fund remains volatile in both directions. Even after Friday's drop, SOXL was up 31.98% from its $40.87 close on November 5 and up 28.42% year to date, but down 12.22% over five years. The article notes that upcoming weekly flow data will show whether retail investors kept buying the dip or began withdrawing.
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