Short selling, or betting that a stock will fall, made billions for hedge funds during the financial crisis. But resurgent stock markets following the US election, negative interest rates and a so-called ‘dash for trash’ spurred by central bank stimulus have inflicted heavy losses on several prominent managers.
Among those to suffer is Horseman Capital Management’s Russell Clark, one of the world’s top-performing hedge fund managers last year, who has run one of the sector’s biggest short bets.
In a January letter to his investors, reviewed by The Wall Street Journal, the London-based Australian explained his bearish stance was based on concerns about deflation, which is normally bad for stocks. In the letter he depicted Fed chairwoman Janet Yellen as Luke Skywalker, the hero of the ‘Star Wars’ films, confronting deflation in the form of Darth Vader.
“You see my jedi,” Deflation Vader tells Yellen Skywalker, the more she tries to boost inflation “the stronger the dark side [deflation] becomes”. During 2016, Clark’s $ 1.7 billion portfolio sharply increased bets that stocks in the real estate, automobiles and airlines sectors would fall, according to the fund’s most recent letter to investors.
The bet has gone badly wrong. His firm’s flagship Global fund is down 18% through November, according to data sent to investors and seen by the Journal, ranking it one of the world’s worst performers. The losses include a 12.8% drop last month alone, as Donald Trump’s unexpected election victory boosted stocks. Horseman didn’t respond to a request for comment. In his most recent letter to investors, Clark said he felt “all alone” in his positioning and ideas, but said a crisis and devaluation in China was getting closer.
Elsewhere at Horseman, Clark’s colleague Stephen Roberts, who took on a big short position during the course of this year, has seen his $ 1 billion European Select strategy lose 40% this year and shrink in size to $ 340 million, according to a letter to investors.
Clark and Roberts aren’t alone.
Crispin Odey’s Odey Asset Management has reported to investors a 48% drop in the value of its European fund so far this year, largely because of bets on falling stocks. Bets against stocks such as Tullow Oil and miner Anglo American have proved particularly costly for the manager, who last year predicted major stock markets could fall 40%. Odey didn’t respond to a request for comment.
London-based Lansdowne Partners’s flagship fund, which made large gains betting against bank stocks during the financial crisis, is down about 15.8% this year, according to a person familiar with the firm’s performance.
A bet against miner Glencore, whose shares have tripled, has cost hundreds of millions of dollars, and the fund, which runs about $ 20 billion, has also lost money on energy stocks, according to its latest investor letter, reviewed by the Journal.
“We are clearly incredibly annoyed by results this year,” managers Peter Davies and Jonathon Regis wrote in their most recent letter to investors.
Bearish funds have underperformed this year.
Short-bias equity funds are down 3.7% through November, according to Chicago-based data group HFR. Equity hedge funds overall, which bet on both rising and falling prices, are up just 0.4% through Dec. 19, HFR data shows. Those are significantly worse performances than major stock markets so far this year, with the S&P 500 up 11% and the FTSE 100 advancing 13%.
Hedge funds turned more bearish—sharply reducing their ratio of bets on rising prices to bets on falling prices—early in the year as markets fell and only gradually turned more bullish, failing to match the rebound in stock markets, according to a Morgan Stanley analysis reviewed by the Journal.
Hedge funds’ losses from short positions in November represent the second-biggest monthly loss for the industry since 2010, allowing for overall market moves, the Morgan Stanley analysis found.
Hedge funds in February were running their highest level of bets against US stocks since 2010, according to data group Markit.
“No one came into this year thinking equities would deliver double-digit” returns, given global growth looked tepid, said Anthony Lawler, portfolio manager at GAM, which runs 119.1 billion Swiss francs ($ 115.77 billion).
Managers point to a range of factors for a lack of success shorting. One common theme is frustration at quantitative easing in the eurozone, Japan and the UK. They argue the stimulus means the market differentiates less between good and bad stocks, which short sellers rely on.
Ultra-low or negative interest rates are also making life difficult. Short sellers borrow a stock and sell it in the market in return for cash. This cash used to earn a tidy sum on deposit—now funds earn nothing or have to pay for the privilege.
“Shorting has been tough,” said Peter Wasko, head of US and global equity multi-manager research at Aberdeen Asset Management, which runs around $ 11 billion in hedge fund assets. He said the bulk of the value added by hedge funds has been from buying stocks, not shorting them. “We haven’t seen a really good year for shorting stock pickers for the last couple of years.”
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This article was first published by The Wall Street Journal