For many months we have covered the "world's most bearish hedge fund", Horseman Global, which over the past several months (and years) has had a stunning run and has generated unprecedented returns (even as it has maintained a net short exposure for the past 4 years) and just last month, after returning 9.6% YTD went record short with a -88% net exposure. That decision appears to have proven unfortunate, if only for now, because as Russell Clark, CIO, reports in the latest letter, "your fund fell 9.62% in March." As a result of the monthly drop, all of Horseman's YTD gains were wiped out.
To find another month in which the fund had such a bad performance once has to go back all the way to September and November 2011, the month when the Fed engaged in a coordinated global bailout, when it launched expanded swap lines with all central banks and especially Europe, as Greece and the Eurozone were both on the precipice. The result was a surge higher in stocks which crushed the performance of the traditionally bearish hedge fund.
So has the recent drubbing discouraged Russell Clark? Au contraire: as the following table of the fund's gross and net exposure shows, instead of reducing his bearish bets, Clarke is adding even more shorts, and as of the end of March he has taken his net short exposure from -88% to an unprecedented, and record -98%!
Insanity? Perhaps. This is how Clark explains his reasoning.
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It has been a very interesting year for active fund managers. As one client put it, most funds got crushed by their long positions in January and February and then in March the short positions destroyed the funds. The Horseman Global is obviously very short, and hence March was a poor month for us.
The first thing to note, and to repeat from last month’s newsletter, is that short squeezes and bear market rallies are part and parcel of running a fund that is net short. And I learnt a long time ago, things that cannot be avoided, should then be welcomed. I am sure some of you are asking how a nearly 10% drawdown can be welcomed? Well if we look at the first quarter, we find that commodities and commodity currencies had a large rally. Furthermore markets like Brazil are up 30% this year. The S&P, despite being down 12% at one point, has rallied to be up to 1% for the year. Despite such moves, we are only down 1% for the year.
A lot of this relatively strong performance came through the use of non-consensus trades such as long yen, Japanese Government Bonds and treasuries. This has meant that we have not been forced to cover our short book, and in fact remain record short. Many other funds have been forced to cover short positions, and are now less net short at much higher prices than six or seven weeks ago. The nature of short selling is that shorts reduce in size when working, encouraging us to add more when they have already fallen, and grow in size when rallying encouraging us to cover. But of course to follow such a strategy would be to flush capital down the toilet. If you wish to be short to make money (rather than to just hedge), then you need to tolerate big moves in the net short position.
For that reason, I have operated a very open policy on what I short. The reason for this is that investors that have been paying attention, should realise March would have been a poor month, but at the same time, if they share my views, should also view drawdowns as opportunities to add, which has indeed happened. This is one reason I welcome short squeezes.
The other reason that I like short squeezes, is that the best time to short is when other investors have suffered so much psychological damage from being short, they have promised themselves to never short again. Judging from the performance of funds with similar short positions to Horseman Global and short covering flow numbers that I have seen, March has seen many funds cover extensively. I find this very encouraging for future returns to the short book.
However, I can hear you say, how do you know this is just a short squeeze, and not the beginning of something much more substantial? While equities are trying to send a bullish tune, the 200 day moving average is now trending down for S&P, Dax and the Nikkei. This is not bullish. Furthermore, yield curves in the US, Japan and Europe have flattened. This is not bullish. Yen is rallying. This is not bullish. We have seen substantial covering by the market. This is not bullish.
To my mind, if you want to be short, this looks about as good as it gets.
Your fund is short equities and long bonds.
At least the man has conviction.