We always enjoy reading stuff from Dialectic Capital, a less-known, but fantastic short biased hedge fund. The hedge fund has strong long term returns. However, the returns for last quarter were not enjoyable Dialectic Antithesis Offshore fund was down -9.4 percent in 4Q2012, which is Dialectic’s Q2 for FY2013.

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Dialectic continues to lose in its short China trades that are based around the real estate market. Going forward, Dialectic Capital has reduced position in China although it still believes that the real estate boom will crumble at some point.

Dialectic calls Chinese banks the “most opaque financial system in the world” and this has boosted shadow lending in the past months which has pumped up the Chinese housing sector.

In the U.S. markets, Dialectic has short bets in consumer discretionary stocks where weaker earnings have continued in the last quarter of 2012. However, the U.S. housing sector seems unfazed by the tightening in the consumer market and continues to grow.

This disparity can be explained by the expansive balance sheet of the homeowners who have benefited from the increasing value of the houses they are living in.

This wealth is reflected by them buying more autos, appliances and even boats. However, the low end consumer is either underpaid or unemployed and thus has less to spend at retail stores like J.C. Penney Company, Inc. (NYSE:JCP), Kohl’s Corporation (NYSE:KSS) and Wal-Mart Stores, Inc. (NYSE:WMT). Long with an improvement in the housing industry, industrial construction is also picking up in the U.S., W.W. Grainger, Inc. (NYSE:GWW) and Cemex SAB de CV (NYSE:CX) have reported bullish outlooks and earnings in the past months.

Dialectic attempts to increase its long exposure in U.S. based on the sustainable recovery it sees in the housing sector while maintaining short exposure in the low end consumer stocks.

Canadian Housing and  Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A)

We have mentioned how Brookfield Asset Management’s financials have confused the management at Dialectic Capital. The fund has stayed on the short side of Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A) for almost a year now.

In general, Dialectic thinks that the Canadian housing sector is on the verge of a meltdown and Canadian housing equities are one of the most expensive in the world. Specifically on the case of BAM, Dialectic believes that the company attempts to exude perceived performance when there is actually nothing underneath, and takes help from accounting wizardry to inflate their assets.

Dialectic writes, “No Brookfield press release is complete without the announcement of a transaction that they have consummated with themselves.” 

Dialetic criticizes BAM’s habit of self dealing and touting transactions that give off an air of aggressive activity. Although not mentioned directly by name, Dialectic talks about how Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A) was able to silence Bill Ackman’s discontent with the way they handled the proposed buyout of General Growth Properties Inc (NYSE:GGP).

BAM agreed to buy Bill Ackman’s warrants that held rights to 18.4 million shares of General Growth Properties Inc (NYSE:GGP) by paying a hefty premium.

Dialectic presents several headwinds that surround Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A)’s business in commercial real estate where global demand has contracted, moreover BAM’s renewable energy unit is exposed to underperforimg energy assets and most of all the shady accounting at BAM gives the highest backing to Dialectic’s thesis.

In Brazil, Brookfield Asset Management Inc. (NYSE:BAM) (TSE:BAM.A) is facing charges of bribery and unregulated business practices in the Sao Paulo court. Dialectic says that the company has refused to talk about this significant event.