John Horseman’s skepticism served him well last year. A bearish view on the markets in 2008 helped the $3.8 billion Horseman Global Fund of London to one of its best years ever—up 31.26%—even as many long/short equity vehicles produced double-digit losses.
In this year’s bull market, however, Horseman is out of step. In August, Horseman lost 0.25%, dragging total losses for the year down to 20.81%. By comparison, the Absolute Return Global Equity Index returned 1.30% in August and is up 11.83% for the year so far. Horseman’s decline is disappointing, because the fund has yet to report a down year and started 2009 off well. But when the stock market began to rally hard in March, Horseman was on the wrong side of the move.
In August, the global equity fund’s short exposure to banks and financials as well as to the DAX Index Future caused the bulk of the losses, while the fund made modest gains by shorting the automobile and real estate sectors and going long the electricity sector. Horseman’s biggest industry shorts were cars, transport, financials, mining and metals and information technology. Horseman’s biggest long position was in Germany’s RWE AG, one of Europe’s five biggest utilities, and it recently bought shares of Munich Re and Chesapeake Energy. Meanwhile, shorts in overvalued Chinese names offset some losses elsewhere as the fund profited from China’s 7% market decline.
Horseman is paying close attention to bank earnings. “The stabilization in housing markets in the U.S. has not led to a reduction in bad debts at the banks,” Horseman wrote. “Write-offs and provisioning are running at an annual pace of approximately 3% of bank balance sheets with no sign of this abating, a figure which more or less wipes out bank interest income on a systemwide basis,” he writes.
As the bull market rides on, Horseman has been scaling back its short exposure, but the strategy is still sufficiently short to benefit from what the fund manager perceives as “weak dynamics for equities.” The funds net short exposure is -38.42%, a decline from the average net short exposure of -46.80% over the last 12 months. Horseman formed his firm in 2000 and launched the global equity fund in February 2001. Since inception, the strategy has averaged an annual return of 17.18%.
--Katrina Dean Allen
