| O. Andreas Halvorsen, Viking Global Investors (Bloomberg) |
After complaining in their client letters for the past several quarters about the difficulty of selling short these days, some long-short managers said in their second-quarter letters to investors that the environment was starting to improve.
A few of them reported making money on their short positions during the period, while others held their own, either roughly breaking even or losing just a small amount compared with strong gains in their long holdings. If this is a harbinger of future fortunes, the timing couldn’t be better, given the recent sharp drop in the market — especially among many of the former high-flying stocks in the technology sector and other industries.
For example, Tiger Global Management, the New York firm founded by Tiger Cub Charles (Chase) Coleman III, posted a 5.7 percent gain in its Tiger Global Investments long-short funds in the second quarter, reversing its 5.5 percent loss in the first quarter. A major reason: After losing 14 percent in the March period, Tiger Global’s short positions were down just 4 percent for the first six months, according to the firm’s second-quarter letter.
Christopher Hansen’s Valiant Capital Partners, managed by San Francisco–based Valiant Capital Management, posted a 1.47 percent gain in its longs and 1.74 percent in its shorts in the second quarter, when its liquid portfolio rose 2.58 percent.
“This was one of those rare quarters where we managed to make money on both the longs and shorts,” Hansen states in in his second-quarter letter.
“Short candidates are easy to find,” David Einhorn’s New York–based Greenlight Capital recently told clients in its second-quarter letter. Even so, the firm’s shorts had a “minimal” impact on the portfolio for the period.
In the first-quarter report, Einhorn and his team said they had cut net exposure from 30 percent to 14 percent. Nevertheless, at the Sohn Investment Conference in May, Einhorn said he was shorting the fracking industry, asserting that fracking companies had taken on too much debt and were overvalued. He especially singled out Pioneer Natural Resources Co.; its stock is down 36 percent since the end of April.
Daniel Loeb’s Third Point, managed by the New York–based firm of the same name, has experienced an uneven year in this part of its book, making money on its short positions in just one of the past four months and three of seven months this year.
When Jonathan Auerbach’s New York–based Hound Partners posted a 17.23 percent gross gain and a 13.12 percent net gain for the first half of the year in its hedge fund of the same name, the long equity portfolio was clearly the star, rising 18.32 percent on a gross basis. But the short equity portfolio lost just 1.14 percent. (The firm does not publish quarterly letters.)
Meanwhile, Lone Cypress, a long-short fund managed by Stephen Mandel Jr.’s Greenwich, Connecticut–based Lone Pine Capital, roughly broke even on its short holdings in the second quarter, making the bulk of its money on its shorts in the U.S. and to a lesser extent in Europe, while losing most of its money on its shorts in emerging markets. The emerging-markets shorts, however, could wind up becoming a major source of gains this quarter if the sell-off in those markets continues.
These results compare with the first quarter, when Lone Cypress made money on its shorts only in Europe, a region that constituted a small piece of the fund’s overall exposure. So it did not do well enough to offset losses on the fund’s shorts in the rest of the world, especially the U.S.
At the beginning of the year, Lone Pine warned in a letter to clients about what it deemed “valuation complacency,” especially among investors chasing yield — from investments such as real estate investment trusts and utilities — and “those implicitly assuming the status quo for historically market-leading businesses currently being disintermediated by more efficient entrants enabled by the Internet. These areas represent good hunting grounds for shorts.”
Meanwhile, Viking Global Equities, the long-short hedge fund managed by O. Andreas Halvorsen’s Greenwich, Connecticut–based Viking Global Investors, reported that in the second quarter, its longs rose 1.7 percent on an unlevered basis, while its shorts dropped just 0.1 percent. This is an improvement from the first quarter. For the first half of the year, the longs gained 9.4 percent and the shorts lost 1.2 percent.
What’s more, in the second quarter the long-short fund’s best performer overall was an unidentified short position in the energy sector. Still, the firm said it was disappointed in its short book. It said it notched “significant losses” in Asia, including Japan, and a number of positions in the emerging markets.
“We have exited some of these and continue to hold others in the belief that our theses will play out over time,” Viking stated in its second-quarter letter.
For his part, Hansen tells clients China was “by far the biggest source of outperformance” among his shorts in the second quarter, although Hansen did also enjoy pretty strong gains on his shorts from the U.S. and smaller amounts in a number of other regions.
On an industry basis, the bulk of the short gains came from financial stocks.
Viking’s letter devotes a fair amount of space to further sounding the alarm about China, and this was before China devalued its currency last week, sparking the market’s latest round of heavy selling and losses.
“While we usually don’t have a strong opinion one way or another on most markets, we do believe there is a high degree of likelihood the Chinese equity bubble will continue to unwind,” Hansen writes in the report. “Given that margin levels and valuations remain extremely high, we believe the sharp losses inflicted on China’s largely uneducated retail investor base are likely to turn their euphoria into pessimism, causing further selling and margin unwinding.”
Hansen adds that if the sell-off regains momentum, “the implications for the Chinese economy, and thus the global economy, could prove very significant.” Which is what is going on now.
Meanwhile, Hansen points out in the report that mainland Chinese markets were trading at extreme multiples. However, he says he is most concerned about “how rampant . . . fraud has become” in both the mainland and Hong Kong markets.
“Over the course of the last several years, we have seen numerous Chinese stocks halted for accounting fraud never to re-open for trading,” Hansen goes on. “While some have been pursued for fraud, many of these securities have simply seen the company sponsors vanish with little explanation or recourse for their investors.” Worse, Hansen argues that the number of fraudulent companies being listed on the Chinese exchanges is “accelerating meaningfully,” since regulators are overwhelmed with a surge in new listings and they are reluctant “to put the brakes on the bubble.”
We should soon find out if Hansen turned this bearish conviction into big profits.
