Daniel Loeb’s Third Point told clients in the hedge fund firm’s first-quarter report that shorts have become a much bigger part of its multistrategy portfolio. “We have invested in more single name shorts this year than in all of 2014 combined,” the firm said.
So far, the New York firm has enjoyed mixed success with its negative bets. Loeb’s shorts in his long-short book overall lost a small amount of money in the first quarter. Overall, Third Point was up 3.3 percent in the first quarter.
However, in January short positions accounted for a 0.2 percent gain when the firm overall lost 2.3 percent. In March shorts kicked in another 0.2 percent of the firm’s 1 percent gain. The firm lost money on its shorts in February and April.
Loeb’s experience is typical among long-short managers in general, who have enjoyed mixed success from their negative bets. A look at more than a half dozen first-quarter letters from hedge funds that engage in shorting shows a wide range of results.
At one extreme are a handful of hedge fund firms that squeezed out small gains from their shorts in the first quarter.
For example, as we earlier reported, Leon Cooperman’s New York–based Omega Advisors, which was up 1.6 percent for the three-month period, told investors in its first-quarter letter that developed-country long equity positions accounted for 102 basis points of gross portfolio returns; developed-country short positions in equities, index futures and options generated 35 basis points; while structured-credit and distressed-debt positions added 20 basis points more.
We also previously reported that Benjamin Gambill’s New York–based Tiger Eye Capital generated a 0.5 percent gross gain from its shorts in the first quarter, when the overall fund posted a 5.5 percent gross return.
However, most funds were like Third Point, posting slight losses from their shorts in the first quarter. In some ways, this suggests that shorts are actually playing their intended role as a hedge in an otherwise profitable portfolio.
For example, Jonathan Auerbach’s New York–based Hound Partners Offshore Fund surged 8.64 percent in the first quarter, according to its one-page performance sheet for March. The Tiger Seed noted that in the first quarter it posted a 12 percent gross gain from its longs and a 1.4 percent loss from its shorts.
William Ackman’s Pershing Square Capital Management. suffered a steeper loss from its shorts. According to an April 29 document prepared for a European investor meeting, longs generated a 7.8 percent gain, while the shorts lost 3.2 percent. This includes a 1.4 percent loss from Ackman’s big negative bet on Herbalife.
At the other extreme are the hedge funds managed by Tiger Global Management and overseen by Feroz Dewan. As we earlier reported, the New York firm’s hedge funds lost 5.5 percent in the first quarter. According to the firm’s first-quarter statistical analysis, shorts heavily accounted for the red ink, losing 8.3 percent for the period. The long portfolio, in contrast, was up 3.8 percent.
Somewhere in the middle is Viking Global Equities, which posted a 4.8 percent net return for the first quarter. Its first-quarter report notes that the total long equity gross return was 7.6 percent, while the short return was a negative 1.1 percent.
However, the Greenwich, Connecticut, firm stressed in its first-quarter letter that it generated a 5.6 percent long-short spread “and produced alpha on both sides,” adding, “we are pleased with these figures and by the improved contribution from our shorts, especially the largest ones.”
In his first-quarter letter, Viking founder O. Andreas Halvorsen explained that his approach to shorting has evolved since he started shorting stocks in the early 1990s and launched his long-short hedge fund in 1999. Back then he was looking for what he described as “truly broken business models . . . companies that would collapse once their flaws were revealed.”
However, Halvorsen conceded that while you can make a lot of money when you are right, these situations are not that frequent and can be very costly when you are wrong. “The risk-reward equation does not seem to be in the short-sellers’ favor,” he explained in the letter. “Thus shorting stocks in this manner is not particularly scalable and the outcome is higher cyclical.”
In fact, Halvorsen conceded that shorting is much more effective in bearish than in bull markets like the past six or seven years.
