‘Liquidity, Concentration, Leverage Are Three Things You Can’t Put Together’: Bobby Jain as a 3x Chip ETF Falls 50% in a Month
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“Liquidity, concentration, leverage are three things you can’t put together.” Hedge fund manager Bobby Jain gave that risk rule in a Bloomberg Businessweek interview released Friday, November 13. Retail investors had just combined all three in one popular fund.
The Direxion Daily Semiconductor Bull 3X ETF (NYSEARCA:SOXL) fell 48.63% from its October 13 close of $127.57 to $65.53 on November 12. The fall continued Friday morning, with the fund down another 17.69% at $53.94.
A Hedge Fund Rule Built for Professionals
Jain is CEO and chief investment officer of Jain Global, a multi-strategy hedge fund he built from scratch after a career at Credit Suisse and Millennium. He described his firm’s new Millennium partnership as a deal in which Jain Global operates as a separate business with a common investor base [Source: Bloomberg Businessweek interview].
Asked whether hedge fund leverage is a concern, Jain supported it. “If you have to use leverage, these firms are the most responsible users,” he said, pointing to strong capital structures and sophisticated prime broker relationships. Looking back over the past 25 to 30 years, he said, “I don’t think you’ve really felt it,” adding that people “learned in ’98.”
Jain was talking about large hedge funds, and he never mentioned retail investors or leveraged ETFs. His comments arrived as retail investors piled into a leveraged chip fund.
Retail Stacked All Three Into One Ticker
U.S. leveraged ETFs took in $9.5 billion in the week ending October 16. That was their largest weekly intake on record in data going back to 2006, and more than double the previous record. For all of October, leveraged ETFs collected about $13 billion, the biggest month in data from Goldman Sachs (NYSE:GS | GS Price Prediction).
The chip fund kept drawing cash. “Retail is buying the dip in chip stocks on leverage,” The Kobeissi Letter wrote, noting SOXL pulled in $5.1 billion the week before November 10. That was its second-largest weekly haul ever, exceeded only by $6.1 billion in the week ending October 16. ETF analyst Eric Balchunas has called it the most popular ETF in South Korea.
Each part of Jain’s warning shows up in this one fund. On concentration, it owns only semiconductor stocks. As of July 31, its largest positions were NVIDIA (NASDAQ:NVDA) at 5.99% of net assets, Advanced Micro Devices (NASDAQ:AMD) at 5.82% and Broadcom (NASDAQ:AVGO) at 5.49%. On leverage, it targets 3x the chip index’s daily move. On liquidity, it held $19.44 billion in net assets at that date, and money surging in and out on that scale can magnify each swing in a crowded trade.
Why 3x Funds Can Lose More Than You Expect
SOXL resets its leverage every day. When chip stocks swing back and forth, that daily compounding can leave the fund well below 3x the index’s return over weeks or months. Traders call this volatility decay.
The losses show up quickly. SOXL fell 30.04% from $93.67 on October 16 to the November 12 close. Anyone who bought during the record inflow week is underwater. Hedgeye said on November 10 that the fund was down 81% from its cycle peak.
The ride has gone both ways. Even after Friday’s drop, SOXL was up 31.98% from its $40.87 close on November 5. It was also up 28.42% year to date. Over five years, though, it was down 12.22%.
Next Week’s Flow Data Will Show Whether Dip Buyers Stayed
The question now is whether retail keeps adding money after a week like this one. Weekly flow reports will show whether SOXL buyers came back after Friday’s drop or started pulling out.
Jain’s rule came from a world of prime brokers and risk managers. The coming weeks of chip stock moves will show how well retail investors can live with all three risks at once. A little speculation won’t wreck a plan if it stays small and follows rules, the sizing and the limits we spelled out in a free speculation guide.
Data Sources
- Bloomberg Businessweek interview with Bobby Jain: his liquidity, concentration and leverage rule, his defense of hedge fund leverage, and his background.
- SOXL price performance and July 31 portfolio holdings.
- Posts on X from The Kobeissi Letter, Hedgeye and Eric Balchunas on inflows, the drawdown and Korean demand.
Contact [email protected] for any questions or corrections.
Jake has been been working in financial media for almost 15 years. He focuses on all things personal finance for 24/7 Wall St. with high hopes to educate and entertain. Most recently, Jake spent 12 years working various roles at The Motley Fool. He started copy editing fool.com content, worked on premium and marketing campaigns, and helped launch The Ascent, a personal finance brand.
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