It’s not too surprising that many long-short equity managers are lagging the wild bull market for stocks. After all, many of them are hedged with short positions that have risen in price, and many managers are far from fully exposed to the equity markets. However, one long-short manager seems to stand out: Russell Clark, who runs the London-based Horseman Global Fund.
Clark’s fund has gained 14.77 percent through October. Sure, that’s well below the 23 percent gain for the S&P 500, which tracks U.S. stocks, over the same period. However, Clark has not only hedged his long portfolio, he is actually net short, by about 42 percent. You read that right: As of the end of the third quarter, he had a 41.86 percent long exposure and an 84.02 percent short exposure. This is up from a 36.25 percent net short position at the end of June. Remarkable, right?
These days, Clark runs a total of $500 million, including separate accounts, or nearly half the $1.3 billion or so now managed by hedge fund firm Horseman Capital Management as of the end of September. This is down from more than $5 billion at the end of 2008, when the firm was celebrated for its prescient bearishness entering the 2008 global financial crisis.
The firm’s founder, John Horseman, earned $180 million in 2008, ranking him No. 15 on Alpha’s Rich List that year after he steered the Horseman Global Fund to a 31 percent net return.
However, Horseman relinquished control of his funds — but not his firm — in 2010 after losing 25 percent in 2009, when he remained bearish and missed the ferocious beginning to the now nearly five-year-old bull market. These days, Horseman is called the chief investment officer of the firm, but he spends only one day a week in the office and does not run the company on a day-to-day basis.
Clark, an Australian who has lived in the U.K. for 12 years, has been with Horseman since 2006, when he ran the emerging-markets fund, which was folded into the Global Fund in 2010 when he took over. Clark is not your typical long-short manager. He describes himself as a macro manager who expresses his views with individual stocks. “We spend most of our time thinking of the macro view,” he tells Alpha in a phone interview. “Once we have the macro in our heads, we know exactly what to buy and short.”
Clark says that while the typical long-short manager is concerned with a company’s prospects, he takes a broader view of an individual market’s currency and its future direction, which he asserts has more impact on the investment world than any other factor. It is a belief born of his years living on and off in Japan in the 1990s, including one year while he was in high school, when the economy and the markets stagnated and the yen collapsed as the government ramped up spending and pushed interest rates to zero.
And right now Clark is highly pessimistic. In general, he says, global economic growth is suffering from low volume and low trade growth. He says the recent surge in the stock market has mostly been the result of the expansion in price-to-earnings multiples.
Clark says he initially went short in the summer of 2011, when he started shorting global mining stocks after noticing very strong supplies of many commodities at the same time that demand started to weaken from Chinese steel companies and others. The May 2011 initial public offering of commodities trader Glencore International was the final tip-off that the global economy might be slowing, suggesting the insiders wanted to cash out. Sure enough, the subsequent collapse in mining stocks led to the collapse in the commodity currencies such as the Russian ruble and the Australian dollar.
The fund is still 14 percent short metals and mining after taking some profits in August. Back in June, when the fund was 16 percent short the sector, Clark explained in a monthly letter to clients that a stronger dollar had put pressure on the dollar-denominated prices of commodities.
“A decline in the growth rate of Chinese fixed asset investments, as well as future consolidation in the highly inefficient Chinese industrial metal sector, will exert long term downward pressures on metal ore prices,” he added at the time.
Clark says that the aggressive quantitative easing policies of Western central banks, including the U.S. Federal Reserve, have weakened their currencies. He adds that these policies also are putting pressure on emerging-markets currencies such as the Brazilian real, the South African rand and the Indonesian rupiah as well as the companies operating in those countries. “We will see emerging markets devalue considerably,” he predicts. “The weak guys go first, then the strong ones.”
The fund is heavily short Hong Kong property companies and companies that generally benefit from consumption in the emerging markets. Clark is also short the Canadian dollar and Canadian oil exporters as the price of oil continues to fall, in part due to increased production in the U.S. “As long as the short book does not lose money, we can take on more risk in the long book,” he says.
Clark is very confident in his short stance. In his June letter to clients, he wrote: “In the last few years, short selling has been a disaster for most funds, especially compared to just buying the S&P. So much so that they seem to have lost interest. Their loss is our gain.”
On the long side, this past summer Clark started moving into Spain and several of its banks after the country’s current account turned positive, thanks to strong exports. It was the same winning strategy he deployed in Ireland in 2011. In September his fund further raised its long exposure to Spain and Spanish commercial banks from 11.4 percent to 14.3 percent, with Clark noting it is focusing on those “with a strong domestic franchise, no direct exposure to Latin America, improving loan to deposit ratios and low valuations.”
He remains positive on the discount retailing sector and financials, with roughly 12 percent net long positions in each of the two groups. The only other sector the fund is net long is consumer staples.
On the other hand, during September the Horseman fund boosted its short exposure to natural gas exploration and production, to net 15 percent or so. It is also 17 percent short emerging-markets financials with no corresponding longs. Horseman also has a 13 percent or so short exposure to real estate. As is typical of hedge funds, Horseman does not name specific stocks it is short.
In September the Horseman fund also all but eliminated the 14.8 percent long bond position it had at the end of August. It had a 25 percent exposure to bonds at the end of June.
“U.S. bonds do not seem to be attracting a bid from emerging market investors anymore, which is significant,” Clark told clients at the end of August. “The U.S. has relied on foreigners to be its treasury buyers for a very long time.” He noted that the two biggest official buyers of U.S. treasuries have been Japan and China, although nearly all emerging-markets central banks have been large buyers of treasuries.
So far, Clark is looking like perhaps the shrewdest global investor around—as long as he does not repeat the mistakes of his mentor. It is something he admits he thinks about often.
Looking back to 2009, Clark says he did not appreciate that most investors were bearish as measured by short interest at the same time that valuations were very low. In retrospect, these were signs of a market bottom, he says.
These days, Clark is watching two critical developments. At one point the global decline in energy prices will become a big positive for many economies, which could send the markets up. “So, I may make money on my shorts but less than the S&P 500 goes up,” he says.
Clark also is watching to see whether the Chinese will start increasing their borrowing. This could heavily boost demand and economic growth in other countries. Historically, the Chinese have been conservative with credit growth because it can lead to political unrest, he says.
Still, Clark warns investors in his fund that he can change his macro opinion abruptly. “I could be net long in a short period of time,” he says. “Some investors find that disturbing.”
Not if he is right and making money for them.
