Takeaway: My self-inflicted debacle with a tail risk ETF

(This is an excerpt from an article written on Substack by Mark Bunting. You can read Mark's full bio below).

DIARY OF A HEDGEYE USER | Warning: Don’t Go Rogue from the Hedgeye Process - 08.02.2024 Panic and Fomo cartoon

The first rule of the Hedgeye investing process is preserve and protect your capital.

The innovative risk management system created by Founder and CEO Keith McCullough is designed to prevent major drawdowns.

Why wear a 75 percent plunge in a stock such as Meta between August 2021 and October 2022 if you can limit your loss to five or six per cent? 

I witnessed both sides of that scenario close up.

Hedgeye, at the time, was advising self-directed subscribers and institutional clients to get out of Meta because Andrew Freedman, the company’s Communications Head and Software Co-Sector Head, had turned bearish on Meta’s fundamentals, and the stock had broken McCullough’s bullish trade and trend levels and flipped to bearish trade and trend.

Meanwhile, a former colleague who runs an investment firm didn’t sell Meta and rode it down to its ultimate bottom because he believed in the company and thought that the market and the media had the story wrong.  

In late 2022, Freedman was quick to recognize that Meta’s business was inflecting and went bullish again, and McCullough’s signals eventually showed bullish trade and trend for the stock.

Hedgeye subscribers following the process would have exited their Meta position before the big drawdown and would have captured most of the stock’s subsequent large move higher when the signal said to buy.

DIARY OF A HEDGEYE USER | Warning: Don’t Go Rogue from the Hedgeye Process - Snag 1391b838

Longer-term, my former colleague was right about Meta. The stock eventually surged nearly 500 percent between November 2022 and April 2024.

But prior to that, he and his unit holders in the company’s main equity fund and those in segregated client accounts suffered a massive loss on paper.  

Would you rather get out with a less than 10 percent loss, possibly have to pay some capital gains tax, and redeploy the capital or take that kind of hit?

The answer should be obvious to most unless you’re a very long-term investor with a multi-year or multi-decade time horizon and willing to wait out huge downturns because you believe in a company’s long-term prospects. 

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ABOUT MARK BUNTING

This is a Hedgeye guest contributor piece written by Mark Bunting and reposted from his Substack publication. Mark is a seasoned financial journalist with 25 years of experience in the industry. His career includes 15 years as an anchor and reporter for Business News Network (BNN Bloomberg), where he also served as London Bureau Chief for three years. He currently is the host of RCTV for Red Cloud Financial Services, focusing on interviews with CEOs and leaders in the metals and mining sector. Mark also plays a significant role at Red Cloud’s conferences, where he conducts keynote interviews and moderates panels. Additionally, he is an on-air host of sponsored content for BNN Bloomberg Brand Studio and has previously been the publisher and host of Uncommon Sense Investor and Capital Ideas Media. Mark started his career with The Sports Network (TSN). He has been a Hedgeye subscriber for three years.. View all posts by Bunting on his Substack. 

X (Twitter) handle: @MarkBunting_

LinkedIn: Mark Bunting

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