The global stock market’s resurgence in the past week or so has been especially painful for those who were short.
This includes the Horseman Global Fund, famous for being net short the past few years. It is managed by London-based Horseman Capital Management. The fund lost more than 4 percent in the final week of the month, putting it down about 1.5 percent for all of October.
Even so, it is still up about 8.5 percent for the year — not too shabby for a fund that is 50 percent net short. That’s right, net short.
The strategy now has about $840 million under management, including separate accounts. Portfolio manager Russell Clark plans to hard-close the fund when it hits $1 billion, which he figures will occur sometime in the first quarter of next year.
Clark is betting big on interest rates coming down further, a mostly contrarian long bet. In fact, about 60 percent of his assets are in bonds. Of that 60 percent, 40 percent are in 30-year U.S. Treasuries, a position Clark established at the beginning of the year and aggressively built up as the year progressed. He also has 15 percent in Spanish bonds and 5 percent in Japanese bonds. “Most of our profits have come from bonds,” says Clark.
He notes that among equities, consensus long positions have fallen, while the consensus shorts have gone up. “The consensus doesn’t seem to work,” he notes.
So, what is Clark’s current case for bonds? Clark says the U.S. looks a lot like Japan. He thinks if rates rise, we will start seeing low inflation or maybe some deflation. This, in turn, will cause rates to turn back down.
Indeed, Clark notes that short-term paper has been selling off, sending rates up a bit, while the long end has rallied, sending those rates down. As a result, the yield curve is starting to flatten, which he says is typical in times of low inflation expectations. Clark also says the strong dollar will lead to slow inflation or deflation, which will hurt emerging markets. He thinks the U.S. Federal Reserve Board will react with quantitative easing again. “They forgot how to raise rates,” he jokes.
And where is his 40 percent equity position? Clark is mostly long Spanish banks and Italian banks, whose stocks act like bonds, he explains.
“Inflation expectations are falling everywhere, which is bad for stocks and good for bonds,” says Clark.
On the other hand, the fund is short emerging-markets financials, Hong Kong and Chinese property developers, oil producers, miners, autos, luxury and gaming.
