| James Chanos, Kynikos Associates (Bloomberg) |
The stock market’s third-quarter surge helped many long-short equity fund managers return to positive territory for the year, thanks in large part to their long books. But most of these same long-short managers are being dragged down by their short books.
Famed short-seller James Chanos’s Kynikos Associates is no exception. The firm’s various short-biased and long-short equity funds are all down for the year, some by double digits.
Its Ursus fund (Latin for “bear”), a U.S.-focused short fund, and Kriticos, a global short fund, are both down around 15 percent for the year. Its Kynikos Opportunity Fund, a small market-neutral/net-short fund that many investors use as a hedge, is off by 13.4 percent for the year.
Two larger long-short funds the firm launched in 2015 — Kynikos Capital Partners and Kynikos Global Capital Partners, as well as offshore versions — are faring better. Kynikos Capital Partners is off by 4 percent for the year. The strategy, which has been offered as a separate account for 30 years, has generated an annualized return of 28 percent, including double-digit gains in each of the past three years. Kynikos Global Capital Partners is down 6 percent for the year. Its strategy has been offered as a separate account since 1996, generating a better-than-20-percent annualized gain.
Chanos is a popular figure at conferences and on cable’s business channels, in part because he is willing to talk about his favorite short positions, although his firm has endured a topsy-turvy ride in terms of asset growth. Kynikos Associates had seen its assets under management shrink from $6.5 billion four years ago to $2.5 billion as of February 27, 2015. However, in the past year, assets rebounded and as of February 29, 2016, the firm had more than $3.3 billion under management.
There is no way of knowing which short bets have played a role in the performance of the Kynikos funds. The firm is said to have dozens of names altogether in its portfolio.
At look at the high-profile positions Chanos has communicated about in public offer a glimpse into what may or may not have worked. But keep in mind that we don’t know when he got into or out of the individual shorts he has spoken about.
This said, we do know that Chanos has drawn wide attention for his years-long skepticism of China’s growth and his bearish bets over there. At September’s Delivering Alpha conference, he also made the case for shorting Tesla Motors. He called its planned $2.6 billion merger with SolarCity Corp. “a “walking insolvency.” He said the synergies are questionable and asserted the company will burn through $1 billion in cash each quarter.
Tesla’s stock, though, is up 3 percent since then. Of course, we don’t know when Chanos opened his short position on the stock. For example, it is down 33 percent from its early April high.
On the other hand, at Delivering Alpha, he told CNBC he had shorted Valeant Pharmaceuticals and was keeping that position open, even though the stock had already tanked.
“We started shorting the stock in the low $100s, added to it in the $200s, choked on it at $290 but stayed short and added to the stock as recently as early this year,” he said in the interview.
Shares of Valeant are now just above $20 per share. Nice!
At the annual Skybridge Alternatives (SALT) Conference in Las Vegas in May, Chanos made the case for shorting then hedge fund favorite Cheniere, the natural gas and liquefied natural-gas company. Chanos had been arguing for some time that Cheniere will drown from its own debt in a very weak energy market yet trades twice that of less-leveraged competitors based on cash flow. “This is financial engineering gone crazy, skewed to the short side,” Chanos said.
The stock, however, has surged more than 12 percent since his presentation. Still, it is off 25 percent from its high last November.
At SALT, Chanos also questioned the accounting at Chinese e-commerce giant Alibaba. However, since then the stock has surged nearly 30 percent, underscoring how difficult it is for short sellers in a generally rising stock market. Sure enough, last week he once again talked up Alibaba’s accounting problems in an interview on CNBC.
The week before SALT at the annual Sohn Investment Conference in New York, Chanos made yet another bearish case for China but focused his presentation on two countries heavily depend upon on China to sell their commodities: Nigeria and South Africa. He then laid out a litany of reasons why the two countries are experiencing turmoil and troubles — financially, monetarily and socially.
Chanos then used this discussion to lead into his case for shorting MTN Group, a South Africa-based mobile telecommunications company, which he said got 62 percent of its revenue from South Africa and Nigeria. Meanwhile, he said, MTN faces a lot of competition, driving down margins. Most of the rest of its business comes from other shaky countries, such as Uganda, Syria and Sudan, as well as Iran. Sure enough, its shares, which are traded on the over-the-counter (OTC) market, are down 11 percent since then.
On the long side, Kynikos manages only about $350 million firm-wide in U.S. long equity assets. And most of it is invested in exchange-traded funds.
For example, at the end of June, his three largest long positions, which accounted for more than 40 percent of its U.S. long assets, were stakes in ETFs tracking the Russell 2000 Index, the S&P MidCap 400 Index and the S&P 500. His next three largest longs, which are much smaller stakes, are also ETFs.
