This year has been a difficult one for shortsellers, but that has been the state of affairs for bearish investors for a long time. Following through with short bets to get to profits takes more patience than long positions anyway, and the added exuberance of bull markets is not exactly helping the cause of bearish investors.
The Credit Suisse Hedge Index has recorded a lower than 5% detraction in three of the nine months that ended this September. The CS Short Bias Hedge Index is down 21.9% so far this year and has recorded a single gaining month in June when it was up 0.81%.
High short interest drives up long interest now
Like David Einhorn put it in his third quarter letter, it is not easy to short when investors find high short interest, a reason to invest in stocks, and the bubble just keeps inflating. It has been pointed out several times that stocks with higher short interest ratios have outperformed by volumes. He said,
Finally, there are the market participants whose investment process appears to be “bet on whatever has made money most recently.” They’ve noticed that stocks with large short-interest ratios have materially outperformed over the last year and they continue to invest accordingly. When “high short interest” becomes a viable stock-picking strategy and conventional valuation methods no longer apply for many stocks, we can’t help but feel a sense of déjà vu. We never expected to find ourselves in an environment like this again, given the savings that were lost when the internet bubble popped.
Greenlight Capital Re reported a 14.6% gross return in the long investments in Q3, whereas short book detracted by 7.4% The fund has posted a net return of 12.2% for the year. Einhorn has suffered in a bet against Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) over the year. In today’s conference call he noted that the losses in short portfolios were broad based in the third quarter. Greenlight Capital has major short exposure – the fund is 107% invested in longs and 72% in shorts on a gross basis.
Long/short funds lagging in the short book all around
One hedge fund that has done equally worse this year is Waterstone Market Neutral Master Fund. Assets of the fund have plummeted from $1.5 billion at the end of May to $966 million at the end of September, and the fund has exposure in both corporate bonds and equities. Over the year the fund has suffered in its short book, and the principal bets that have driven the returns were against SUPERVALU INC. (NYSE:SVU) and Fannie Mae/Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac/Federal Home Loan Mortgage Corp (OTCBB:FMCC).
Sandler Capital’s Sandler Offshore Fund has managed a 3.9% gain through the year so far, after recording a +2% return in Q3. The long short equity hedge fund has suffered a 5.8% detraction on gross basis in the short book while the long book of the offshore fund was up 8.8% in the third quarter.
Alan Fournier’s Pennant Capital’s managed a 8.8% gross return in the long book of its Windward fund but short portfolio was down 3.8% in the third quarter. The net return of Pennant’s Winward was up 2.9% in the quarter, bringing the YTD gain to +8.03%. Similarly the Broadway Gate Fund also saw loss in the short book while the long book did well.
Odey Asset Management’s Odey European has either managed to break even or lost in the short book in the past months. The London-based hedge fund with dozens of shorts disclosed across Europe has seen few winners on the short side. The long equity book was up 6.7% in September while short equities lost 4% in the same period.
Undeterred, Kynikos alums open new hedge fund
Meanwhile alums of the most bearish hedge fund manager around, Jim Chanos, are opening a new short biased fund, Bloomberg reports. Mike Monnelly and David Bonnier, who have previously worked at Kynikos Associates, will now be co-managing The Arhammar Short Alpha Fund Ltd. Arhammar will seek to find companies in these four areas; boom-that-goes-bust, consumer fads, aggressive accounting and structurally challenged businesses. Kynikos Associates manages $6 billion and has history of successful shorts that it kept betting against with patience.
Waterstone will remain patient, sticking to its bets
In September again, the returns of Waterstone were punished in its short position in SUPERVALU INC. (NYSE:SVU), according to a monthly letter seen by ValueWalk. The fund continues to believe that the retailer’s business is uncompetitive, with no outside investments, and suffers from lack of innovation. The fund is also amazed at SVU’s repeated adjustments in accounting and flipping numbers from past years. The company keeps adjusting the balance sheet to somehow reduce expenses: in the second quarter the company took down several costs as one time and classified payments from a “Transition Services Agreement” with its largest shareholder as part of recurring adjusted EBITDA. However, in the third quarter, payments from TSA were taken into account as revenues, thus offsetting the company’s losses in gross profit margins and masked revenue that would have been lower otherwise.
After restating prior years and moving $267 million of expenses from their business segments into corporate overhead, SUPERVALU INC. (NYSE:SVU) now says it has zero net, adjusted, corporate expenses. Last quarter, it added back several costs as one-time and also included one-time “Transition Services Agreement” payments by SVU’s largest shareholder as part of recurring “adjustments.”
Despite its losses, Waterstone is sticking with its bet and believes that it will take a few more quarters of disappointing earnings before the market stops over pricing its business. The fund estimates that the stock should come down at least 50% and fall to the $3 range.
Waterstone notes in its commentary that it expects its biggest losers to become the largest gainers over time. The managers admit that it will be improbable for their strategy to gain in ebullient markets like today’s but they are confident that trend will reverse and their thesis will prove correct. Other than shorting SUPERVALU INC. (NYSE:SVU), the fund has a high-conviction bet against New Albertson’s credit.