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The “World’s Most Bearish Hedge Fund” Capitulates After Surge in Redemptions
“At some point in my life, and I can’t remember exactly when, I learnt two things that define my approach on how to deal with problems. The first is simply to tell the truth, while it may be unpleasant, at least it is then out in the open and you can begin to work towards a solution. The second is that if something is unavoidable, then just accept the fact it will happen and deal with it.”
– Russell Clark, CIO of Horseman Global
At the end of 2016, we reported that having successfully avoided a calamity for most of 2016 despite being massively net short, somewhere to the tune of around -90%, at times rising as high as -105%, Horseman Global, finally had a bad month. In fact, losing -12.80% in November the hedge fund which we previously dubbed “the world’s most bearish hedge fund” due to its staggering net bearish bias, had just suffered its worst month in history as “the short book, the bond book and the forex book lost money.” We also wondered if Horseman would also have it worst year ever, outpacing the -24.7% return in 2009. The answer was no, but just barely. After a 7.81% drop in December, Horseman Global has closed the books on 2016 with a 24.03% net loss, its second worst in history.
Unfortunately, 2017 did not start well for Horseman Global’s CIO Russell Clark; in fact, while two months ago we noted that the fund had started to close parts of its short book and was actively reducing “gross” exposure (perhaps Clark here meant net), it was “still long bonds and short equities.” As a result, as the next table shows, Horseman has started off the year with the worst two-month stint on record, losing 6.55% YTD. Never before in its history has the famously bearish hedge fund had such a dour start to a calendar year.
Just as importantly, as previewed two months ago, as part of the fund’s net exposure drop, what was as recently as December a net -100% short, has since collapsed to only -12%, effectively a neutral , following a short covering rampage by Clark.
At the start of the year, Clark told his LPs that after losing 24% in 2016 on what ultimately ended up being a failed bearish bet, he would start covering his net short:
Despite what I think, we are beginning to close parts of our short book. We have largely exited airline related shorts. We have also closed staple shorts, as they were largely there to protect against a fall in yields, which they did to a degree. We have also closed many developed financial shorts to make some space for Chinese financial shorts. We have also reduced the bond position and moved much of in to German bunds. The majority of the bund position is in 5 year bunds, the buy case I made a few months ago.
In retrospect that Bund long may not have been the best bet, and the LPs appear to agree. The result: a redemption spike amounting to 10% of AUMs.
Currently we have redemption requests for about 10% of AUM. Changing strategies means saying goodbye to old investors who bought into the old strategy, and welcoming new investors who buy into the new strategy. That’s just the nature of the way I manage money, where once I change my mind I move quickly to where I want to be. The upshot is that we are reopening the fund to new investors April 1.
This in turn forced even more liquidations in the Horseman Fund, and prompted the CIO to change his startegy from an outright bearish, to a far more netural – and outright bullish on Emerging markets – one, a move some may say could have top-ticked the market. How did Clark explain away his 2016 error, and the shift in strategy? To his credit, quite directly:
The truth is that in 2016, I was finding many short themes in developed markets, while not seeing any resolution in China. To square these observations up, I had assumed we would get some sort of financial crisis in China, which would take down all markets. However, in the end it looks like China has managed to enact capacity cuts that have reduced the risk of a major financial crisis.
What I find interesting, is that US markets have moved up on the promise of reform, even though they look fully valued in my view. China and India we have already had reform take place, and the stocks are not priced for these benefits. Plainly the choice is obvious for me. Long emerging markets, short developed markets is the strategy for the fund.
Finally, for those who are leaving their funds with the hedge funds in hopes that Clark will turn things around in 2017, here are his parting words:
While the drawdown is disappointing, what I find really exciting about markets, is that I am going long assets that used to own all the way back in 2007. These assets have been in close to a ten-year bear market. Typically, they have fallen 90% or more over that time, and have become forgotten by the market. They also incredibly cheap. Even more exciting is that all the other fund managers that used to own these assets back in 2007 and were my competitors, have essentially left the industry. This is a typical result in the fund management industry where most managers are unwilling to short sell. Most people only know Russell Clark the short seller, but some older investors still remember Russell Clark emerging market bull of 2006/7. And now we have a synthesis. We are now long emerging markets and short developed markets.
* * *
Below is the full letter
You fund lost 3.23% net this month. Losses came from the short book and the currency book.
At some point in my life, and I can’t remember exactly when, I learnt two things that define my approach on how to deal with problems. The first is simply to tell the truth, while it may be unpleasant, at least it is then out in the open and you can begin to work towards a solution. The second is that if something is unavoidable, then just accept the fact it will happen and deal with it.
The truth is that in 2016, I was finding many short themes in developed markets, while not seeing any resolution in China. To square these observations up, I had assumed we would get some sort of financial crisis in China, which would take down all markets. However, in the end it looks like China has managed to enact capacity cuts that have reduced the risk of a major financial crisis.
In India, we have had three huge reforms over the last few years. Digital ID system, the reform of the tax system, and now demonetisation. These reforms will make doing business far easier in India. The nexus of a China cutting commodity production, and an India with a strong growth outlook, is to be bullish commodities, and this is where most the long book is now focused. The flip side of this is that higher commodity prices will impact spending and margins for western consumers. So we have spent the last two months, expunging bearish positions on EM and replacing them with long positions. At the same time we have been adding developed markets shorts.
What I find interesting, is that US markets have moved up on the promise of reform, even though they look fully valued in my view. China and India we have already had reform take place, and the stocks are not priced for these benefits. Plainly the choice is obvious for me. Long emerging markets, short developed markets is the strategy for the fund.
The second thing about changing strategy is that there are various unavoidable things that will happen, about which much there is little we can do. First, with a change of strategy, there will be people that will wish to redeem. Currently we have redemption requests for about 10% of AUM. Changing strategies means saying goodbye to old investors who bought into the old strategy, and welcoming new investors who buy into the new strategy. That’s just the nature of the way I manage money, where once I change my mind I move quickly to where I want to be. The upshot is that we are reopening the fund to new investors April 1.
The other negative with changing strategies, which is why I don’t do it very often, is that it costs money to do, somewhere between two to three percent. This is a rule of thumb, and comes from recently closed shorts falling after you close, and recently purchased stocks tending to have a give back after being bought. It also because it normally takes a while to get the balance between different parts of the portfolio right. I have tried different ways in the past to minimise this, but the outcome is always the same. This cost of changing is a large part of the performance this month.
While the drawdown is disappointing, what I find really exciting about markets, is that I am going long assets that used to own all the way back in 2007. These assets have been in close to a ten-year bear market. Typically, they have fallen 90% or more over that time, and have become forgotten by the market. They also incredibly cheap. Even more exciting is that all the other fund managers that used to own these assets back in 2007 and were my competitors, have essentially left the industry. This is a typical result in the fund management industry where most managers are unwilling to short sell. Most people only know Russell Clark the short seller, but some older investors still remember Russell Clark emerging market bull of 2006/7. And now we have a synthesis. We are now long emerging markets and short developed markets.
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