John Hempton Audio Interview On Short Methodology

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The Intelligent Investor interviews Bronte Capital’s John Hempton

John Hempton has extensive experience in global markets with Platinum Asset Management – an Australian based global fund manager. John was the chief analyst for financial stocks globally and a partner in the business.  A more extensive curriculum vitae can be found here.

Here’s the audio interview

14 January 2014

Separately Managed Account Client Letter for December 2013

We had a good month and all-up it’s been a satisfactory year with the USA and Australian accounts up 37% and 63% respectively, net of all fees. We are a long fund that shorts on the side and we have stated many times that the goal is to more or less keep up with upmarkets
and not to hurt too badly in down-markets. And 2013 was a rip-snorting up market – and we more or less kept up. There are relatively few long-short funds that did better than us and plenty we respect who did much worse.

Over December we had our usual collection of small calamities. One short went up 150 percent very quickly for instance. It was only a 40bps position – but is now a 100bps position and so somewhat less comfortable. We have covered none but if it were to go up another 150bps we would have to take our medicine (which means booking losses for you, dear clients). The company will go to zero but that is no guarantee we will make money on the

Despite our debacles most things went okay, especially from the middle of the month. The beginning of the month was not great (we reported that in our last letter) but then John went on holidays and our results improved. We are not sure of the correlation but this is a repeated pattern.

The generalized short-selling debacle of 2013

In 2013 overconfident shorts in several stocks were exposed. When the year begun there were large short positions in Herbalife, Tesla, Netflix and a few other stocks where the shorts have now been categorically shown to be wrong. When short-sellers are wrong on a crowded trade in a bull market they get cruelly and unusually punished. But cruel and unusual punishment was not confined to situations where the shorts were wrong. The emblematic loss of the year was Uni-Pixel – a highly promotional touch-screen manufacturing company. We shorted our typical sub 1% position at 12 and it went into the mid 40s. We were forced out of the short by lack-of-borrow in the low 30s. The stock is now trading below 10. Even if the stock goes to zero (which is a distinct possibility) we have no chance of making up our losses.

Full PDF see here: Client Letter 201312

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