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PG&E Corporation (PCG) Redux…

I’m on vacation, but how could I escape the news that California is burning? While PG&E Corporation (NYSE:PCG) has yet to be blamed for these fires, as I sit here in the North Carolina mountains, it sure seems silly to tempt fate. Yeah, I know, I’m the fool for expecting an Event-Driven (ED) situation to work into the teeth of California’s fire season. That’s my own fault and after scaling back my exposure, I’m prepared to call this one a mistake. In any case, publicly getting one wrong ought to be illustrative of how ED trading is supposed to work.



Q2 2020 hedge fund letters, conferences and more

The Negative Implications For PG&E Corporation

Despite taking a mulligan on this one, I still came out well ahead financially. I lost a few dimes on my common, roughly offset by the few dimes I made on some covered calls (remember how high IV was??). Let’s call that position a wash. Meanwhile, the August puts that I wrote went out worthless for a good-sized win (I booked mine a few days before expiry). I still have some Septembers decaying away, because nothing has changed about the thesis itself, though the position is now much smaller as the perceived risk has increased. Overall, it was a profitable trade—despite the state burning up, with negative implications for PG&E Corporation.

You cannot win them all. In fact, you’re likely to get a good chunk of your ED positions wrong. The key is that you rarely lose much when you lose—yet you bank nicely when you win. Often, due to the fund-flow mechanics, you actually make some money on the mistakes as well.

As the number of active managers declines and more of the financial system’s fund-flows are dictated by passive management mandates, the predictability of these Event-Driven opportunities will continue to increase. For those of us in active management, this will become a veritable gold mine. A lot of my friends complain bitterly about passive taking over the markets. To them, I have only one thing to say.

When the rules of the game change, you need to change. If you aren’t front-running these index funds that need to buy or sell some massive percentage of a company’s float, you’re not thinking creatively. You can sob about how cheap your value stocks are, or you can evolve. Event-Driven trading wins, even when it loses. The fund-flow tailwinds are just that powerful currently—especially as prop desks cannot provide liquidity like they used to. I’m going to be writing a lot more about this topic. You can be a sucker and wish the world went back to 2002, or you can make a whole lot of money. I prefer the latter.

California is burning and America’s most hated company hasn’t even traded down on the news—that’s how powerful these fund-flows are. We’re entering a golden age for Event-Driven trading. Who’s ready?

Disclosure: Funds that I control are short PG&E Corporation puts.

By Adventures in Capitalism