This page has been archived and commenting is disabled.

Vikings Float Off Course On Short Covering Gale

Tyler Durden's picture




 

Ole Andreas Halvorsen is one of the best hedge fund managers bar none. And yet his Viking Global Equities massively underperformed the S&P in Q2: VGE generated a barely profitable 0.5% in Q2, a 15.4% underperformance of the S&P over the same time period. The problem - sticking with a rational and sensible fundamentally-driven strategy:

"The market rebounded strongly in the second quarter, and our short positions contributed a significant loss as they appreciated more than the broad market indices. At the same time, our longs performed in line with the indices. Due to our positive net exposure, Viking’s net return was virtually flat in spite of the negative long-short spread."

Then again, in this Fed sponsored bizarro world, only permabullish, pro-cyclical managers who are giddy to be back in the halcyon credit bubble days of 2006 like Larry Robbins are killing it. And as everyone knows, why do fundamental analysis, when the only reports relevant to each and every company for the next few years are the Z.1 and the H.4.1

Yet even Viking, which is known for being traditionally skeptical is starting to buy into the rally.

Our gross exposure increased from 86% to 112% in the quarter while our net exposure increased from 29% to 37%. We made a conscious decision to increase gross exposure as the uncertainty around government and regulatory actions has abated and we feel the market is more stable. We anticipate a further rise in gross exposure, but have not set a target level. Gross exposure increased through a combination of market movements and new idea generation. The rapid appreciation in share prices around the world inflated the values of both our longs and shorts, growing our balance sheet without producing material profits. We continually push our analysts to come forward with great ideas, and I am encouraged by the productivity of the investment staff and the number of new ideas we have added to the portfolio as changing stock prices provided opportunities for repositioning. At the end of the quarter, we had 145 equity positions, up from 125 positions at the beginning of the quarter.

Also for HF clones, here is what you should do if you want to replicate the Norwegian's portfolio:

At the end of the second quarter, Invesco Limited was our largest long position at 4.2% of capital. Our ten largest longs comprised 32.2% of capital and the ten largest shorts accounted for 12.2% of capital. The largest individual short position represented 2.3% of capital. The following is a list of our ten largest long positions on June 30th (in order of size):

Invesco Limited (IVZ.N)
Mastercard Inc. (MA.N)
Visa Inc. (V.N)
Unilever NV (UNc.AS)
The DIRECTV Group, Inc. (DTV.O)
Google Inc. (GOOG.O)
JP Morgan Chase & Co. (JPM.N)
The Walt Disney Co. (DIS.N)
Bank of America Corp. (BAC.N)
Qualcomm Inc. (QCOM.O)

On the flip side, the focus of negativity falls in the banking, capital goods and other financials spaces.

And while most other hedge funds claim to be enjoying massive inflows of capital, the same is apparently not the case for the Norwegian Greenwicharian:

Gross external redemptions for the second quarter were 4.9% of capital under management. We continued our longstanding business practice of running the fund cash flow neutral by seeking to replace redemptions with offsetting subscriptions during the period. On only four occasions in the past ten years, when the combination of idea generation and liquidity were aligned, did we grow our capital base through incremental subscriptions.

Bottom line, the Vikings' underperformance is temporary.... or rather, it can only persist as long as the artificial constructs that drive the market higher day in and day out are in place. One can hope that truly efficient, fundamentally driven capital markets can return one day. Look for Viking to be a coincident indicator when Ben Bernanke allows that particular event to occur.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Wed, 07/22/2009 - 10:34 | 11819 Anonymous
Anonymous's picture

Tyler, I think the performance problem can be linked to one simple fact: they had the same position as the rest of the non-institutional traders, and specifically, they were short.

It's self-evident that everyone can't be short at the same time. When everyone is short, it makes it incredibly easy for the big institutional traders, specifically the prop desks, to squeeze the markets. The biggest players know where the small players stand--the small players, after all, are their clients. When they see a long list of short positions, they know fully well they can bid up the market, send out the margin calls (to their own clients, in many cases), and profit as the markets explode upward.

The implication is that knowing the fundamentals is not enough; active market participants have to know what positions the other participants are taking. And when the rest of the small and medium-sized traders are short, it's a reasonable bet that the big traders are going to move it in the other direction, and vice versa. That's the strength of contrarian analysis, and why it sometimes makes sense to take a position that fundamentally makes no sense at all.

Wed, 07/22/2009 - 11:47 | 11860 poydras
poydras's picture

I suspect the majors have models that effectively game their clients.  This practice should be clearly illegal.

Wed, 07/22/2009 - 10:42 | 11824 BabaBooey
BabaBooey's picture

Great post Tyler. 

If I could choose any manager in the world to run my fund, it would be Halvorsen. He is the best of the best.  Some people dont care for him personally, but what does that matter. 

Wed, 07/22/2009 - 11:03 | 11836 Gilgamesh
Gilgamesh's picture

And watch the market soar to new highs on Schapiro's statement now.

Wed, 07/22/2009 - 11:48 | 11863 Anonymous
Anonymous's picture

Ben Bernanke, paraphrased from about 5 minutes ago, "I don't think we see the same level of bubble component in CRE that we saw in residential real estate." Either he is lying outright or he is obfuscating in his statement (as the potential problem in CRE could have a far worse bubble component). Now, rhetorically, why is it that we have the Federal Reserve?

Wed, 07/22/2009 - 11:59 | 11880 Mos
Mos's picture

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained"

Wed, 07/22/2009 - 12:03 | 11881 Gilgamesh
Gilgamesh's picture

Ben is prepping everyone for the upcoming CRE bailout.  It would be counterproductive for him to call CRE a bubble like housing; the backlash on talk of taxpayers buying CRE at 'housing bubble level prices' would be severly damaging to their plan.  No, no - he will say there is a 'potential problem' and we need to act now to avoid losing the great progress they have made in stemming the tide and facilitating conditions for recovery.

 

In other words, lying through his teeth to the sheeple in order to further pick the winners and losers chosen by his buddies in the shadows.

 

Or... if he truly just said "I don't think we see the same level of bubble component in CRE that we saw in residential real estate"...  I would say that is perfectly true; the level of bubble in CRE is greater.

Wed, 07/22/2009 - 12:09 | 11886 Anonymous
Anonymous's picture

Agree w/replies to my rhetorical question. But, it was rhetorical. My mind is made up why we have the Fed (and it sure isn't for me, mine and the rest of the great, unwashed peasantry.

Wed, 07/22/2009 - 11:58 | 11877 Anonymous
Anonymous's picture

After seeing Viking's largest long positions I have no idea how it can be argued that it is a value fund.
My understanding is that Viking didn't do that great in 2008 which should be the benchmark to ascertain which hedge funds are really doing what they've been paid to do. Andy is moving more and more into the long only space, following hot on the heels of one of his other beta buddies, Von Muffin at Cantillon. Its over for these funds charging alpha fees for beta products.

Wed, 07/22/2009 - 11:59 | 11878 Anonymous
Anonymous's picture

They also significantly underperformed when the market rallied in 2003.

Wed, 07/22/2009 - 12:36 | 11902 Anonymous
Anonymous's picture

Why didn't you post the letter in its entirety?

Do NOT follow this link or you will be banned from the site!