Gammon Capital Up 449% Is Betting on New Wave of Market Turmoil


A New York hedge fund that’s gained 449% in this year’s pandemic roller-coaster is betting on a new wave of volatility in the event Congress fails to extend a key bank provision in any new stimulus bill.

As time runs short on breaking the legislative impasse, Gammon Capital LLC has been loading up on bearish stock options to wager on the prospective market fallout.

One big risk: An accounting provision in the Cares Act that lets U.S. banks suspend the recognition of some coronavirus-related loan changes is due to expire by the end of the year. Without an extension, banks’ financial results would look worse, according to Michael Mescher, founder of the $22 million fund, with the potential to hit the economic recovery and stock rally.

Gammon Capital Up 449% Is Betting on New Wave of Market Turmoil

“In the absence of stimulus getting extended, all of this treatment ends,” Mescher said. “We’re adding more left-hand tail risk because it’s clear the market doesn’t realize this.”

The 39-year-old former Barclays Plc trader is referring to measures that allow banks to defer labeling Covid-related loan modifications as troubled debt restructuring, as well as the temporary easing of capital requirements for community banks.

The rising number of U.S. coronavirus cases combined with the risk of tougher lockdowns under an incoming Biden administration also make it more likely bearish wagers will pay off, he added.

Gammon Capital Up 449% Is Betting on New Wave of Market Turmoil

The Trump administration and Congress have failed for months to break the legislative gridlock over another bill for economic relief. Hopes are rising of a breakthrough Monday, with a bipartisan group of lawmakers set to unveil a $908 billion pandemic relief package. Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi are due to continue bilateral negotiations.

A framework released by a bipartisan group on Dec. 9 did not explicitly mention the extension of those bank provisions highlighted by Mescher. The next plan is due later on Monday.

There’s also no guarantee any bill will pass Congress -- providing ammo to volatility traders like Mescher. The Lehman Brothers Holdings Inc. alum has made his career speculating on options in special situations, a Wall Street term referring to corporate mergers, restructuring and event risks. While his volatility fund is designed to thrive in market turmoil, it has racked up eye-watering gains this year through both the stock selloff and the rebound.

The fund returned 449% through November this year net of fees, according to an investor letter seen by Bloomberg News.

Volatility Bets

Gammon has been placing bearish wagers via put spreads on banks and real-estate investment trusts. It’s also betting on higher stock volatility with options expiring in the first half of next year, funding the position by selling protection in November and December contracts.

When Mescher started Gammon in New York City some five years ago, it mostly provided customized strategies. After managing money in individual accounts, it launched a fund last year.

The former partner at Ronin Capital credits the fund’s success to its use of machine learning to find the most profitable combination of options to ride both bull and bear regimes. The fund’s strategies are mostly quantitative in nature with some discretionary input -- like trades exploiting the likely fallout from any expiry of stimulus.

“The nice thing about trading vol and having your strategy be a vol-based strategy is you don’t really have to get the direction of the market right,” he said from Long Island.

©2020 Bloomberg L.P.

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