June, 2014 - In This Issue:


White Flags and Black Swans


From the Desk of Alan Salzbank
Alan Salzbank, Fund Manager, Riverpark Gargoyle Hedged Value Fund
Alan Salzbank, Portfolio Manager

 This past June 14th saw the annual celebration of Flag Day, with the Stars and Stripes waving proudly in neighborhoods across the nation. In the intervening weeks, as the stock market has shown remarkable levels of complacency regarding risk, I found myself wondering what  investors who have been reluctant to get back into the market following 2008 would run up the flagpole next.


Some signs suggest it may be the white flag of surrender. "Don't fight the Fed" is a well-known Wall Street aphorism but, in the wake of the financial crisis, many investors found themselves doing just that.  Although the Fed has been rather transparent (and insistent) about its desire to put a floor under equity prices, many investors, stung by the events of 2008, have held on to the view that the markets are too risky to justify further investment. This view appears to be changing.


Often referred to as the "Fear Index", the Chicago Board of Options Exchange S&P 500 Volatility Index (VIX) measures the level of expected near-term market volatility by looking at the premiums investors are willing to pay for 30-day S&P options. The VIX tends to rise during periods of falling or turbulent markets and fall during periods of steadily rising markets.  It recently hit a low of 10.34 - a level not seen since the beginning of 2007 - indicating that investors are growing accustomed to the low volatility environment ushered in by the era of the "Bernanke Put."  It is not unusual to see retail-investor market inflows increase during extremely low volatility environments, as the perception of risk is decidedly muted.


However, while the VIX may be signaling that retail investors are waving the white flag, there is another sentiment gauge that bears watching - the Credit Suisse Fear Barometer (CSFB). Unlike the VIX, which measures current levels of expected volatility and is agnostic towards market direction, the CSFB measures how much investors are willing to pay for downside protection compared to upside exposure (often referred to as "skew" in the options marketplace).  Specifically, the CSFB looks at the price of a 10% out-of-the-money S&P 500 call and then determines which 3-month S&P 500 put could be purchased at the same price.  On June 24th, the CSFB hit an all-time high of 37, meaning that a put would have to be 37% out-of-the-money before it could be purchased with the proceeds from a 10% out-of-the-money call sale.


The substantial excess premium attached to out-of-the-money puts indicates a supply/demand imbalance, and suggests that institutional investors are willing to pay up for insurance against significant future market downside. While the past does not necessarily presage the future, it is interesting to note that the CSFB spiked to 29 in May 2007 ahead of the previous market top, and bottomed out at 10.3 four months prior to the market turn in March 2009. So, while the coming months may bring white flags fluttering in the breeze, there is no guarantee that a black swan is not lurking around the corner.

RiverPark/Gargoyle Hedged Value Fund Passes $60MM AUM

Gargoyle is pleased to announce that the RiverPark/Gargoyle Hedged Value Fund has continued its strong growth, and exceeded $60 million in assets under management during the month of June.  Thanks to advisors, investors and supporters like you, we are realizing our goal of making RGHVX/RGHIX a foundational part of our firm's total advisory and management asset base of over $500,000,000.


We look forward to continued growth in assets as new investors come to understand the potential benefits of Gargoyle's Hedged Value approach to investing, and we thank you once again for your support.


Garoglye Firm Brochure
2014 Firm Brochure

At Gargoyle Investment Advisor L.L.C., we understand the need for investors and portfolio managers to keep pace with the demands of today's ever changing marketplace. For the last 25 years, from our beginnings on the floor of the American Stock Exchange to the establishment of our Investment Advisory and Institutional Option Overlay Service, we have weathered the storms that have shaken the markets and found ways for our clients to prosper in the long term. We will approach the next 25 years with the same commitment to value, performance and service that has been the cornerstone of our success.
Alan Salzbank

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