A hedge fund manager named his No. 1 short position, and it highlights why everyone is freaking out about Europe
Whether its the banking system in Italy, Portugal or the UK in the aftermath of Brexit, there's plenty to be concerned about.
In an interview with Raoul Pal of Real Vision TV, Edward Misrahi, the founder and chief investment officer of RONIT Capital, set out his views on Europe's banks. You can get a free 7-day trial at Real Vision TV here.
Misrahi was a partner at Goldman Sachs and went on to help set up hedge fund Eton Park. He usually focuses on emerging markets, but when he was asked to choose one short position, his answer was telling.
Here's the relevant passage from the transcript:
Raoul Pal: If you were to choose one short, where would it be?
Edward Misrahi: This could get me in trouble. There is one trade I think you would like. I think that the best tail-risk insurance there is right now is puts on Deutsche Bank.
Pal: I think they are going bust.
Misrahi: By the way, I think that they are going to get nationalised. I think for me, that is the best hedge of any portfolio. Incredibly, you can still buy out-of-the money puts, not that expensively, which I find crazy.
To recap, a put is an option to sell a stock at a certain price on or before a certain date, and they're basically a bet that a stock price will fall. If a stock is currently trading at $30, and the strike price on the option is $30, the option becomes more valuable as the stock price falls.
In an out-of-the-money put option, the strike price might be $25. These options are generally cheaper because there is lower likelihood that they'll come into the money. If the stock price does fall, however, these options quickly become more valuable.
We've previously written about how John Cryan, Deutsche Bank's CEO, has the toughest job in banking. The bank had to assure the market it could pay the coupon on its bonds earlier this year, a remarkable position to be in for a bank of its size. The bank's share price is down more than 40% in 2016.
Misrahi also said he is worried about the Italian banks and described them as a "total mess."
So yeah, lots to worry about in the European banking system.