The firm with one of the hottest hedge funds of the past few years has launched a new Japan-focused fund. And it has gotten off to a very fast start.
London-based Horseman Capital Management, known for its wildly successful Horseman Global Fund, trotted out the Horseman Japan Fund in October. It is up 17 percent through the first two months of this year.
The Japan fund, a long-short equity strategy, is so far admittedly very small; it has only $19 million, and the strategy has $23 million. It is run by Shannon McConaghy, who has been with Horseman since July 2014.
When looking for investment opportunities for the new fund, the firm seeks what it describes as “deep rooted, long term, structural changes which will persist despite business cycles, leading to a major decline or major increase in profits in a sector/industry.” The fund’s offering document asserts that investments are expected to have a low correlation with equity indexes.
Like its more famous stable mate Horseman Global, the Horseman Japan Fund is heavily net short, by more than 75 percent as of the end of February.
A big chunk of the short positions is in emerging-markets-focused exports in the auto, steel and industrial industries, among others. Its biggest single negative industry bet is on regional banks, while it is also heavily short real estate.
On the other hand, the fund is long the discount health care, defense and security sectors as well as ADAS electronics (advanced driver assistance systems), described as the first step toward driverless cars.
Interestingly, the fund’s documents make the case that the Japanese market is a very good one to short during a global crisis. The managers found that going back to 1966, the Japanese market falls more during corrections than the MSCI World Index and even “the major ‘shortable’ markets most close to crises.”
The hope among investors, of course, is that the fund goes on to enjoy the wild success of Horseman Global even though the strategy and the manager are different. As we have chronicled several times over the past few years, Horseman Global, led by Russell Clark, has surged despite being heavily net short in a rising market.
The fund has risen between 12.6 percent and 20.5 percent in each of the past four years. As a result, the fund now has close to $1.1 billion, while the strategy has close to $1.9 billion.
In 2015, Horseman Global benefited from a big long bet on U.S. Treasuries. At the end of August, the fund was 50.84 percent net short equities and 48.35 percent net long bonds. By the end of November, the fund boosted its short position to 66.2 percent, mostly by hiking the short exposure.
It was up another 9 percent or so through the first two months of this year. It gained 8 percent or so in January, boosted by its short equity book, especially from the auto, real estate and emerging-markets financials sectors, while its longs lost money. It also made money from currencies and the bond book, according to its January letter to investors.
In February, Horseman Global gained about 1.5 percent thanks to Japan-related positions. “The big rally in the yen helped our currency book, bond book and shorts Japanese stocks positions,” Horseman explains in its monthly report. It also built a position to short aircraft manufacturers and aircraft leasing companies.
Entering March, the fund continued to expand its net short exposure in equities, bringing it to nearly 88 percent from nearly 76 percent just one month earlier. Its long bond exposure rose to 59.26 percent from 55.34 percent just one month earlier. The only sectors it is net long are retailers and defense.
In his January report, Clark explained that he spends most of his time “thinking about and trying to live six months to one year in the future.” He said he tries to figure out the reaction to what is happening now and how it will affect future prices.
Given this thinking, Clark sees U.S. growth slowing and the market pricing in reduced monetary tightening. This should lead to a weaker dollar, he added.
“This makes shorting Europe and Japan very appealing,” Clark elaborated. “Theoretically, this should make commodities and emerging markets attractive, particularly if you are of the view that U.S. dollar strength is the reason emerging markets and commodities have been so weak.”
Clark stressed that a chronic commodities oversupply and what he deems to be “real financial issues in China that cannot be resolved easily” make commodity-related areas very unattractive. “Furthermore, the reaction to reduced tightening by the Federal Reserve would almost certainly be more easing by every other central bank in the world,” he added, stressing that monetary activism is not always effective.
“I also worry about the prospects of a trade war, as populism becomes the new normal in politics globally,” Clark added. “The future for me is now more uncertain than at any time I can remember.”
Sounds like that sentiment spread to the firm’s Japan team as well.
