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“Clarity Has Returned”: World’s Most Bearish Hedge Fund Stages Stunning Recovery, Returns 17% In One Month

Courtesy of ZeroHedge. View original post here.

According to (always wrong) conventional wisdom, anybody who has remained bearish on global markets since the financial crisis has not only lost a boatload of money, but has missed out on the opportunity to cash in on one of the most torrid bull markets in recent memory. They should also be out of business, insolvent or both.

Of course, as Horseman Global’s Russell Clark has proven over and over again, this is not the case at all. A few years back, we anointed Horseman “The world’s most bearish hedge fund” for a very simple reason: Of all existing asset managers, Russell Clark may have the biggest and longest net short position in history. Just look at the chart below, which shows not only that Clark’s net exposure was a remarkable $-78.6% (after -88.14% in March), with a gross short position of 102%, but that he had been effectively net short since 2011.

Yet, to assume that Clark has either thrown in the bearish towel, or somehow lost his shirt over the past ten years would be a mistake. Actually, his fund outperformed the S&P 500 for the period between 2012 – when he first went net short – until the end of 2018, only underperforming in  2016. In 2014, Clark posted double-digit returns when oil prices cratered (he was short). In 2013, he made money shorting Brazilian equities. He started with just $111 million when he took over the fund in January 2011, but AUM peaked at $1.5 billion in 2015.


However, the fund’s inconsistent performance (it’s not unusual for Horseman to be up or down 5% in a single month) has alienated some investors who are uncomfortable with the volatility, even as Horseman has bested most other hedge funds in terms of performance, as one former investor told Bloomberg.

Tim Ng, chief investment officer of Princeton, N.J.-based Clearbrook Global Advisors LLC, says his fund pulled its money for similar reasons. “The stretches of negative performance and the high volatility of monthly returns became a consistent drag on our portfolio’s overall return, which prompted us to redeem,” he says.

But after a bruising Q1, when Clark got crushed by the torrid rally in US equities, more LPs have pulled out, and AUM has shrunk to just $713 million.


And unfortunately for Clark, as we wrote last month, after a dismal Q1, the fund’s losses more than doubled in April, when the it was down a staggering 12%, which brought its total loss YTD to more than 25%. 

However, as we further noted for the fund which was massively short semiconductors, salvation was just days away, as after the disastrous April plunge in the fund’s P&L, the best possible news for Clark was that after a relentless ramp higher, none other than Donald Trump came to Horseman’s rescue, with the recent return of US-China trade – and the most violent escalation in global tech war – which sent semi stocks tumbling in May…

… and suggesting that much if not all of the April losses would be reversed, leading to our conclusion that “Horseman will have a far better YTD performance after May.”

That’s precisely what happened, because as Clark wrote in his latest letter to investors, the fund staged a remarkable rebound in May, returning a whopping 17.13%, which was its best return since October 2011, and its second best month in history.

It is no surprise then that Clark begins his latest letter in an almost euphoric fashion, and after the near-self doubt expressed in some of his other more recent letters, he starts off with a bang, to wit: “I must say, I love the hedge fund business. I am reminded of the scene in Trading Places when Winthrop takes Valentine to the commodity trading floor, and says “This is it. The last pure bastion of pure capitalism left on earth”. These days, with equities, bonds and currencies kept well within central bank control, sometimes there seems to be no pure capitalism left.”

However, in the hedge fund space, Darwinian capitalism still rules supreme. Make money or get out. Be the best or go home. And I love it.

The problem, as Clark’s mother used to tell him, “Only the mediocre are always at their best”. And here the abovementioned self-doubt comes creeping back: “the last three years I have not been at my best. In part for the central bank interference, but also because there are many crosswinds have been blowing. From the bottom of the fund in the last cycle in 2011 through to the top of the fund in early 2016, the prevailing winds were so easy to read. Falling commodity prices, underperforming emerging markets and strong bonds. As long as you did not stray from these area, it was hard to go wrong.”

Things got especially difficult in 2016, when “there was a bunch of mixed messages. This means investors have tended to focus on the future. Stocks that have growth (tech) or are guaranteed to exist in the future (real estate, staples and utilities) have prevailed in portfolios. This has led into a widely commented on feature of the market, the outperformance of growth and quality versus value.”

But then, the Horseman CIO adds, “the strangest thing happened at the end of April” when “the market gods decided that it was time for some clarity (or as much clarity as you ever can get from markets).” Market gods… or Trump who in early May rekindled the trade war with China, but that’s irrelevant for now, and instead in response to what was the clarity Clark refers to, he says that “China is likely headed for a recession and some sort of devaluation. The market indicators of this are fairly dear, with Chinese Yuan proxies such as Australian dollars, Korean Won and Taiwan Dollar all depreciating recently.”

Why does that mean China is going to devalue? Well Australia, Korea and Taiwan all have better trade balances, current accounts and fiscal positions than the US, and with expectations of US rate cuts rising, they should have appreciated. Australian dollar in particular is hard to understand given the huge rally in iron ore, except in the context of fears of Chinese devaluation. Recent moves in Hibor relative to Libor underscore this fear.

As a result, with the changes he made to the portfolio at the end of April, which we discussed previously here, “which reflected these changes in market, and all of them immediately made money.”

From long bonds, to a greatly reduced long book, to additions to the short book.

Even more exciting to Horseman is that when he looks at the long standing autocallable theme in the fund, “a China devaluation would likely cause many of the main markets that have suppressed volatility to fall dramatically, namely Kospi 200, HSCEI, Nikkei 225 and the Euro Stoxx 50.”

What is he talking about? Precisely what we discussed in “As Autocallable Issuance Explodes, Is This “Ground Zero” Of The Next Vol Catastrophe?

Clark’s conclusion: “So clarity has returned. And just as Winthrop tells Valentine, it’s time to “buy low, sell high. Fear – that’s the other guy’s problem”. Your fund is long bonds, short equities.”

Alas, Clark’s euphoria won’t last long, because after a solid – for bears – May, June saw the strongest S&P performance in 84 years…. and the pain for the world’s most bearish hedge fund as confirmed by its latest exposure…

… will be nothing short of historic, with its performance in June likely to be another double digit return, only this time in the negative direction.

* * *

One final point: Clark’s assiduously dedicated contrarianism has earned him a cult following among professional investors. Though his name isn’t as widely known as an Ackman or a Loeb, his interview with RealVision was one of the company’s most requested videos from 2018, largely thanks to his reputation built up on these pages over the past 5 years as the “world’s most bearish hedge fund”, yet one which stubbornly refuses to throw in the towel.

Despite a wave of redemptions in 2016, 2017 and 2018, Clark, who keeps the bulk of his own wealth in Horseman, has retained an unflappable confidence in his investing view: “When people hate you and write terrible things about you, it tends to be the best time to invest.

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