Russell Clark, manager of the Horseman Global Fund, who was heavily net short all last year, finished 2013 up 19.15 percent.
This is remarkable considering that the S&P 500 rose more than 32 percent, including dividends reinvested. What’s more, Clark’s fund gained another 9.9 percent in January.
Clark, who manages the fund out of the $1.4 billion London-based hedge fund firm Horseman Capital Management, outperformed the average long-short equity fund as well as many prominent managers who were net long all year. And he accomplished this while keeping the portfolio about 40 percent net short all year.
“In 2013 we were playing in a deflationary, no-growth environment,” Clark said in a recent interview. “The overlay was a U.S. dollar that was too cheap.”
The bulk of Clark’s returns last year came from his long book, especially discount retailers, such as the TJX Cos. and Dollar Tree, that benefited from consumers looking to cut costs due to the slow-growing economy. In the first half of the year, he also made money going long Irish bonds, which he sold midyear.
On the short side, Clark made good money betting against several currencies tied to the commodities markets. For example, since last summer he made money shorting the Australian dollar, a trade he has had on for a few years. He also made a little money toward the end of the year shorting the Canadian dollar.
“Quantitative easing managed to weaken the developed-world currencies versus the currencies of places such as Brazil, Australia and Canada,” Clark says. “This created artificial demand in developed markets from the emerging markets, which is now starting to reverse.”
Clark now thinks deflationary pressures will persist in the U.S. With the Canadian dollar down, he anticipates U.S. carmakers crossing the border to buy cheaper parts, fueled in part by cheaper labor costs, which in turn will lead to lower prices in the U.S.
Meanwhile, as the U.S. dollar continues to rise, Japanese carmakers will be better able to compete here. Clark says this explains recent warnings from General Motors Co. and Ford Motor Co.
So what is Clark doing now in what he thinks will remain a low-inflation environment? For one thing, he says that since December he has been aggressively buying U.S. Treasuries and German bunds. Today slightly less than 40 percent of his $650 million in assets are in bonds. He also cut his long positions in U.S. consumer stocks. He says the recent weak U.S. jobs report vindicated this decision.
On the other hand, Clark is shorting U.S. automakers and consumer staples companies, although he won’t name names.
Clark also says he bought some Japanese yen in December just before the currency began its rally, and he began shorting a few Japanese stocks. He remains slightly net short Japan but concedes it is “not as easy” to do as it was back then.
Clark’s 9.9 percent gain last month underscores how deftly he is navigating the markets right now. But he is not a perma-bear. He is always looking for the market bottom, the best time to reverse direction, which he is prepared to do abruptly.
However, this day won’t come until the emerging markets sell off further. Clark says the prices of a lot of the bonds are still too expensive, particularly in Brazil and Turkey. He says Brazil’s currency is overvalued and that the country’s central bank needs to devalue it as Argentina recently did.
Says Clark, “They need to sell off before I get aggressive.”
In the meantime, he plans to close his fund when it reaches $1 billion, which he hopes will occur in a few months. He wants to be nimble enough to overhaul his portfolio once his conviction changes.
“It is great to be net short,” Clark says. “We want to be able to go long in a short period of time. At $1 billion we will be able to do that.”
