| James Chanos of Kynikos Associates (Bloomberg) |
Let’s face it. Shorting in a bull market that is now in its seventh year is not exactly the easiest road to riches.
We have several times chronicled how a number of high-profile hedge fund firms have seen big gains on their longs, only to have them heavily offset by losses on their shorts, including Larry Robbins’s Glenview Capital Management and a number of Tiger Cubs.
However, if all or most of what you do is engage in shorting, you don’t have those bull market gains on your longs to offset your losses.
The results could be disastrous.
This is apparently what is happening to James Chanos’s New York–based Kynikos Associates. According to its recently filed ADV, Kynikos reported $2.5 billion in assets as of February 27, 2015. This is way down from $4 billion last year and more than 60 percent lower than the $6.5 billion the firm reported managing just three years ago at the start of 2012.
We don’t know exactly how Chanos’s funds performed last year; the firm did not return at least four phone calls seeking comment or clarification.
However, at the beginning of 2013, when Kynikos had $4.2 billion under management, 20 percent of its assets were in the Kynikos Opportunity Fund, its long-short hedge fund.
The rest of the assets were in two funds that only go short. Ursus — Latin for “bear” — is a U.S. short fund, while Kriticos is a global short fund.
Now, keep in mind that Chanos is paid, in part, on his ability to generate alpha. So, absolute losses on his shorts are not all bad.
This is what happened in 2012, when losses of less than 10 percent versus stock market advances of 16 percent-plus enabled Chanos to top the Rich List second team with $195 million.
So don’t write off Chanos just yet. He is a longtime survivor of the great bull market of the 1980s and 1990s. The Milwaukee native and Yale University graduate established his reputation in 1982 at New York–based Gilford Securities, where he identified accounting irregularities at Baldwin-United Corp., a piano maker that had gone into selling insurance. The company eventually filed for bankruptcy.
At the time, Chanos said one reason he focused on shorting was because most investors concentrated on the long side.
Chanos, who launched Kynikos Associates in 1985, was also an early skeptic of the accounting practices of energy company Enron Corp., which also ended up filing for bankruptcy.
In 2008, when global stock markets collapsed, Ursus rose 60 percent.
In recent years Chanos has spoken publicly about a number of his negative bets. For instance, he has been broadly negative on China, which he believes is undergoing a major construction and credit bubble that will eventually burst.
In 2011, when he ranked No. 14 on the Rich List with $200 million, Chanos cashed in on his bearish bets on China when the Shanghai Stock Exchange dropped 21 percent.
Chanos was also rewarded that year for his assertions that solar energy was not cost efficient, that its business was restrained by reductions in government subsidies and that profitability was being hurt by Chinese competitors. Although he did not disclose the specific stocks he was shorting, many of the best-known solar companies fell between 75 and 85 percent that year.
Still, the Chinese real estate collapse that he has claimed will be a thousand times worse than Dubai’s still has not materialized. And in the past year alone, the Shanghai Shenzhen CSI 300 Index has nearly doubled.
In 2013, Chanos became very negative on Hewlett-Packard, calling it “the ultimate value trap for investors,” and on Dell, after founder Michael Dell announced plans to take the company private.
However, these shorts may not have worked out for Chanos either. After falling below $13 in November 2012, shares of HP more than tripled by early 2015, although the stock did suffer temporary smallish setbacks along the way. We don’t know exactly when and at what price Chanos made his trades.
In May 2014, Chanos said he was short Valeant Pharmaceuticals International, a favorite long among activists and Tiger Cubs. The stock is way up from every single day an investor could have bought it in 2014.
In November 2014, Chanos said he was short art auctioneer Sotheby’s, the target of several activists. The stock is either up or about flat from every day in November.
Alas, one stock Chanos has publicly touted has done very well — Apple, a long bet for him.
However, going long the largest company by market capitalization in the U.S. is not exactly a career niche play.
