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A hedge fund celebrated for racking up double-digit gains for four straight years — while running net short in a raging bull market — has reached a pivotal time in its life.
Horseman Global, headed by Russell Clark and operated by London-based Horseman Capital Management, suffered a huge 24 percent loss last year and was down for the first two months of 2017.
As a result, the firm tells clients in a recent letter that it has received redemption requests for 10 percent of its assets. The exodus of its old-time clients comes as the fund has aggressively shifted its strategy to a much more bullish stance, as the fund has heavily pared back its short positions.
To replace the departing money and to accommodate investors who share Clark’s new stance, Horseman is reopening the fund to new money on April 1.
“Changing strategies means saying goodbye to old investors who bought into the old strategy, and welcoming new investors who buy into the new strategy,” Clark recent told clients in a monthly letter.
As we have reported numerous times, Clark went net short in 2012. From 2012 through 2015 he posted gains of 12.5 percent to 20.5 percent in each of the four years.
As recently as the beginning of December, Horseman Global was less than 23 percent long and more than 128 short, for a net short position of 105.73.
Clark’s bearishness was rooted in his belief that China and other emerging markets faced huge economic problems. He was a big believer in the deflation view, including in the U.S., and went heavily long bonds, especially U.S. treasuries, and short commodities, mining, and materials. He also bet against the currencies of the countries heavily reliant on commodities. In general, Clark has been long developed markets and short emerging markets. However, he followed his big loss last year with more losses this year, dropping 6.6 percent in the first two months.
In October 2016, the fund lost nearly 5 percent from its bond book, foreign exchange, and its short book. After the November election in the U.S., the stock market continued to surge, led by the cyclicals that Horseman was skeptical of, as well as financials, while interest rates surged, hurting bond prices. Horseman lost 12.6 percent in November but remained 106 percent net short. It then lost another 7.5 percent in December.
So, at the beginning of the year, Clark started to shift his portfolio. By the end of January he cut his net short position to less than 34 percent and to just 11.85 percent the following month.
Now, he is shifting to a long emerging market, short developed markets stance, noting this is appealing “as the broader investment community is positioned the other way.” Horseman has aggressively pared back its negative bets in Japan and the rest of Asia.
“The key is the U.S. dollar,” Clark adds in a report. “If this starts to weaken meaningfully, then the financial and political pressure on China will weaken dramatically.”
“I am going long assets that [we] used to own all the way back in 2007,” Clark told clients in his February monthly letter. “These assets have been in close to a ten-year bear market. Typically, they have fallen 90 percent or more over that time, and have become forgotten by the market. They also are incredibly cheap.”
In his January report, Clark said he had a neutral position on emerging markets, with a long mining position offset by a short position in Chinese financials.
In the developed markets, he said he was “very short” U.S. retail, mostly REITS and retailers. “Higher commodity prices, particularly gas prices, will slow consumption growth and put pressure on margins,” he said.
He also remained short autos and short German and Japanese financials and long U.S. entry level homebuilders.
The bottom line: If Clark starts another run of consecutive double-digit gains, he will be deemed a genius and one of the most prescient hedge fund managers of our time — perhaps even the next Stanley Druckenmiller.
If he continues to lose money, he will be yet another manager who thrived for several years during one market environment before flaming out in another. I’ve seen a lot of those guys over the years.
Stay tuned.
