Short-seller Carson Block believes he has found a better way to bet against companies.
With market "volatility still so low, this [new] strategy depends on options," he said at the Kase Learning: The Art, Pain and Opportunity of Short Selling conference in New York. "We look at the capital structure. If there is debt, we can go long those bonds and use cash flows to buy long-dated out-of-the money puts."
The investor said the strategy, which he calls the "future of short-selling," does well in this market environment versus shorting stocks directly. He said it can make a "few percentage points" when the market rallies but can do much better when the market declines.
A put gives an investor the option to sell when a stock hits a certain price. The bond part of the strategy involves buying corporate debt that generally would benefit when a stock goes higher but would get hit if it falls.
"Senior credit recoveries tend to be very good," he said.
The fund manager said senior credit bonds prices often drop marginally when a company's stock price falls dramatically.
Block is chief investment officer of investment firm Muddy Waters Capital. He is known for his short-selling research, which led to several government fraud investigations and financial restatements.