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Why A Hedge Fund That Has Been Short For Three Years, And Wildly Profitable, Remains Short
One of the most flawed misconceptions about the New Paranormal in which central bank intervention to levitate markets and protect from plunges is not only heretical but demanded (to paraphrase Rick Santelli) is that one has no choice but to be long stocks (and judging by all the equity "experts" opining on fixed income for the past 5 years, short bonds) in order to generate profits.
That is utterly false as the simple case study of $2.2 billion in AUM Horseman Capital Management clearly shows.
As can been seen in the following chart showing the fund's gross and net exposure, the hedge fund flipped net short at about the ttime the recession started (and long before Bear and Lehman) then went long in early 2010 and flipped back short in 2012, where it has remained for the past 3 years.
Suicide? Not at all. In fact ever since going net short, the fund has returned on average 16% per year, outperforming about 98% of its peers.
But how can one maintain such a stunning track record with a preponderance of shorts in a market in which central banks have injected $22 trillion in liquidity to prop it up (and in the case of China are arresting stock shorters and sellers)? Simple: by having a long-bond pair trade, something most one-track mind equity pundits don't realize is a perfect natural hedge to rigged markets.
So is Horseman tired of being contrarian and is it eager to join it zombified central-bank frontrunning (and market underperforming) peers?
Not at all.
Here is the latest strategic and market commentary from Horseman's June letter:
* * *
Your fund made a small positive return for the month. The majority of the returns came from the short book and currency book, while the long book and the bond book detracted from returns.
I caught up with an old friend from university, who had gone into science. I could tell that he did not think finance was an appropriate use for my grey matter. I tried to make it sound more appealing to him, by trying to explain things in a scientific way. “Markets” I told him, “have their own Heisenberg principle. The best stocks to buy are those that are least liked, and the worst ones are the ones that have risen substantially and people are most excited about.” He remained unconvinced.
After more questioning, I had to admit that I did a lot of short selling. “So you make money when other people lose money?” I was asked. To which I had to answer in the affirmative. “Isn’t that evil?” I then gave my usual answer of business cycles, and how things would fall in value anyway, so I provide a service to my clients. But I could see that my questioner was not convinced. And on reflection, perhaps I was not convinced either. The reality is I love finding a good short, and profiting from the bad investments, foolish business plans, or misguided policy choices. It’s fun for me. I accept who I am. I am the bad guy.
I always think about short selling as picking the moment of peak delusion just before reality sets in. Peak delusion, so to speak, almost always centres on some key economic variable that typically has been in such a long up cycle that investors have come to believe it is secular rather than cyclical. Dot-com in late 90s, US housing up to the financial crisis in 2007, peripheral European bonds until 2011 or commodity prices until 2012.
While markets gyrate according to the whims of Greece’s government, the trading of China’s stock market seems to me far more intriguing and actually far more important. Chinese policy makers generally get what they want. However, despite official efforts to prop up the stock market, including interest rate cuts and forcing lower margin requirements on brokers, equities have remained weak this month. Perhaps, things will turn around but if investors begin to lose confidence in the Chinese government’s ability to control the market, then they just might lose confidence in other parts of the China story.
For me the key issue is that Chinese workers now look expensive relative to their productivity. Hence exporters from China are suffering. Property also looks expensive, and even though there are signs of rising property prices, domestic Chinese steel prices fell almost every day last month. Even adjusting for collapsing iron ore and coal prices, Chinese steel margins hit new all-time lows. I have trouble matching up collapsing steel prices with China successfully inflating the economy.
In my view, Chinese authorities needed a strong stock market to help attract or keep money invested in China as they cut interest rates. Certainly most countries that have cut interest rates in the last few years have seen a weaker currency. China has cut rates but not had any currency weakness – which strikes me as odd. Unless the stock market turns around soon, I would expect the Renminbi to begin to depreciate. A weakening Renminbi in a period of slowing global trade volumes would be very deflationary. Most commentary I read suggests people believe that the bond bull market is over and reflation is the way to go. I suspect we may well be at “peak China” and “peak reflation trade” at the moment.
After spending the last few months being knocked back by the markets after a strong January, it is time for me to be the one who knocks. Your fund remains long bonds and short equities.
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Long, bitchez!
Greece fixed, Iran fixed, marriage fixed, stock market fixed, debt fixed, employment fixed, economy fixed, environment fixed, race relations fixed, dollar fixed, Iraq fixed, immigration fixed, Afghanistan fixed, China fixed, Euro fixed, america fixed, your life fixed...change the word "fixed" with "rigged" and I'm right
Don't forget the dog and the cat.
After more questioning, I had to admit that I did a lot of short selling. “So you make money when other people lose money?” I was asked. To which I had to answer in the affirmative. “Isn’t that evil?” I then gave my usual answer of business cycles, and how things would fall in value anyway, so I provide a service to my clients. But I could see that my questioner was not convinced. And on reflection, perhaps I was not convinced either. The reality is I love finding a good short, and profiting from the bad investments, foolish business plans, or misguided policy choices. It’s fun for me. I accept who I am. I am the bad guy.
Not at all. In fact, I would go so far as to say that short-sellers are the only ones capable of delivering us from greater evil at this point. They're like modern-day Jesus Christs. We need more of them.
If you make money someone else always loses. Go long, stock goes up, what about the poor sap who sold it to you? Sell short, stock goes down, what about the poor sap who owns the stock?
There may have been a time when one investor's gains did not mean another's loss but that was back when we had a thriving economy. The Ponzi is a negative sum game.
Caitlyn is about as fixed as a Dude can get.
Since Bruce was an Olympic Decathlon champion, does that mean Caitlyn is the only female Olympic Decathlon champion ever -- or is it a Heptathlon champion?
Or change it to "broken".
There are several stocks that are at their 52w lows and continue making new lows. Look at all the shale stocks, look at shit like LVS, WYNN, MGM, SNDK, MU, STX, WDC and a lot of tech shit. Oh, and you can always short uvxy and vxx for a huge profit lol
Takes two to make a market and since short selling is such a small component of the trade (where do I find the shares to begin with?) your chances to make money at it are quite high.
There have no shortage of opportunities to making money in this way since the Double Whammy of Taper and War with Russia slammed into Wall Street.
So no...this definitely NOT a "rigged casino."
You are paying he dividend to the holder of the actual paper if you are short however.
That can turn out to be a SHIT TON of money.
You can give me three thousand down arrows for that comment.
This is just a plain and simple FACT.
Of course Mr Market loves nothing better than someone who believes in their own bullshit too...
"(where do I find the shares to begin with?)"
Your broker will find them for you from among the margin accounts he manages. If not there, then he'll borrow them from another broker. Not hard to do unless it's a really obscure stock.
"You are paying he dividend to the holder of the actual paper if you are short however."
Only if the stock pays one. Most don't, or the amounts involved are insignificant. Not many good dividend payers anymore and as a long, you always face the risk of a dividend cut (something short sellers look for)
Point of fact: anyone who owns a margin account is making their stock available to shorts. If you want to stop short selling, then eliminate margin borrowing. Good luck with that.
IMO, short sellers have taken the place of regulators who are NOT doing their job. Short sellers look for companies engaged in fraud, manipulation, misrepresentation, excessive executive payouts and so forth. If it's rotten, sooner or later they'll find it because, unlike most longs, shorts do excellent research.
Another point: In today's fraud ridden markets, it's far easier to find bad companies trading above true value than good companies trading below. The exact opposite of a bear market bottom where babies get thrown out with the bath water and all you have to do is walk around and pick them up.
Frankly, I have more respect for short sellers than any other players in the market. They are the bane of those factions trying to bull the market higher using other people's money, and AFAIC, that's a good thing.
Fight The Fed.
dup.
Rentiers - speculators or ' functionless investors ' - are of course to be eliminated. JM Keynes
It's useful to borrow and support or attack portions of economic doctrines to suit.
In the above statement Keynes would be advocating the elimination of .Gov, Central Banks and Entities like Goldman/JPM today.
but also savers, pensioners, and grandmas. That is why it is folly. Savers are the lifeblood of capital -- or used to be.
Dogs and cats living together! Mass hysteria!
doesnt the greek parliament vote tomorrow on whether to accpet harsher terms than they rejected the week preivous? there is no concern that the greeks will say 'just fuck it' ?
What's yes in Greek again?
Chinese equity market is a sideshow, a fraction of their economy compared to developed and especially US equity market.
And even with the huge recent rise, multi-year performance has been much higher for the S&P, higher than any other market in the world over 10+ year time frames.
The greatest bubble without doubt is in the US and the reserve currency that funds it. Many of the other global bubbles are derivatives of the US dollar bubble, funded by all the US paper that has come their way to 'pay' for all their exports.
I love how all these anglo masters of the universe investors fall over themselves to declare 'peak China', when they are at the heart of a system that is way beyond its best-before date.
LOVE your screename, two of my favorite ideologies
They got hammered in 2009 (founder resigned) by betting against equity rebound. Hence flip from short to long in 2010.
Great numbers befroe 2009 after 2010.
Around 10 yrs ago, I went net short and never regretted it once. Much easier to navigate markets even in this prolonged upswing.
"Much easier to navigate markets even in this prolonged upswing"
Agreed, providing you avoid the following:
The "must own" stuff that the idiot public buys. Best ex. AAPL.
Anything that's part of a major index for obvious reasons.
The only profitable hedge funds are those who trade on insider information.
Working with the SEC?
"I'll take peak delusion for $2000 Alex..."
While China's stock market is not the microcosm of its economy, it is far too positive to imagine that they are not tottering to manage a huge credit bubble that they creat for themselves. Not imminent but a struggle at avoiding implosion.
Their first act of financial reform has blown in their face with the stock market meltdown. An experiment where Central Planning can manage markets...LOL
Forget about all their rhetorics of Silk Road, AIB (Infrastructure Bank) and the internationalization of the RMB. These can only contribute/balance global growth if they first get theri house in order. They know it and will get even more tentative with their reforms.
Towards at best decades of soft landing. In basic agreement with the Writer.