A hedge fund that has been one of the best performers of the past few years despite being heavily net short has suffered a major setback and is now down sharply for the year.
The Horseman Global Fund, headed by Russell Clark and managed out of London-based Horseman Capital Management, suffered big losses in the weeks leading up to and following the U.S. presidential election. As a result, it was down nearly 18 percent for the year through November, dropping nearly 5 percent in October and 12.6 percent last month.
The fund had risen between 12.6 percent and 20.5 percent in each of the previous four years. Earlier this year the fund had boosted assets to nearly $1.1 billion, while the strategy overall had nearly $1.9 billion.
In 2015, Horseman Global benefited from a big long bet on U.S. Treasuries. In October of this year, the fund lost money from its bond book, foreign exchange, and its short book.
“I think the Trump win has seen many investors sell defensive positions and buy cyclical positions,” Clark said in the fund’s October monthly report, written after the election. “I suspect they will come to regret that. Your fund remains long bonds and short equities.”
As it turns out, it was Clark and his team that did the regretting. Horseman Global entered November more than 84 percent net short equities and more than 65 percent net long bonds.
Since the election, however, the stock market has continued to surge, led by the cyclicals that Horseman was skeptical of as well as financials, while interest rates have surged, hammering bond prices.
Sure enough, Horseman says it lost more money in November on its short book, bond book, and foreign exchange.
“Since the election, the market narrative is that tax cuts and fiscal spending by the Trump administration will drive growth in the U.S., and this will drive inflation,” Clark writes in his November report. This sentiment has led investors to sell bonds and buy U.S. dollars and industrial commodities such as copper and oil, he explains.
“The problem I have with this narrative is the way that Asian currencies have traded since the Trump election,” Clark continues. ”They have been particularly weak. This is very unusual.”
He stresses that Asia is the source of most global demand for commodities and a huge supplier of goods to the U.S. He points out that since the 1990s, Asian currencies have generally followed U.S. bond yields higher and lower and have closely tracked movements in commodity prices. The only exception was during the extraordinary volatile period of 2007 and 2008.
Going forward, Clark believes the Chinese financial system is showing signs of stress.
“Corporate bond yields are rising, the Chinese Yuan is weakening, and outflows are continuing,” he adds in the letter. “In my view, the Trump election has made a large Chinese devaluation more likely. Mainland Chinese investors are desperately trying to get out of the Yuan, and the People’s Bank of China is trying to defend the value of the Yuan.” Clark says they are doing this by selling Treasuries.
Meanwhile, he thinks the rise in commodity prices is driven by increasing capital controls in China. The upshot: Clark assures investors he believes his macro model “still looks valid, despite recent moves.” He says the model indicates it is impossible for countries that have engaged in quantitative easing to then normalize interest rates without causing financial crises with their trade partners.
Horseman remains short equities and long bonds. The fund actually has widened its net short position to 105.73 percent, reducing its gross long position and increasing its gross short position.
The only U.S. stocks among its top ten longs in each of the past two months have been three retailers: The TJX Cos., Burlington Stores, and Costco Wholesale Corp.
It also slightly increased its net long position in its bond book to nearly 70 percent.
“When the fund went net short in 2012, we spend [sic] many years all alone in our positions and worldview,” Clark stresses. “This is how I prefer to be. In January and again after Brexit, the market has come much closer to our positioning, and returns have been poor as a result. In the month since the U.S. election, I again feel all alone in our positions and ideas, while at the same time the macro indicators in China, as well as the increasing desperation of the authorities there to reduce capital outflow means we are getting close to the devaluation and crisis that I have long expected.”
