When investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund’s negative return when everyone else lost a lot of money. However, hedge funds that break even during such periods deserve extra credit.
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Moez Kassam of Anson Funds has a solid track record of protecting wealth during some massive selloffs like the one in March 2020. So how does he do it?
Background Of Anson Funds
Anson Funds runs a market-neutral strategy with short, long and special situations strategies. Chief Investment Officer Moez Kassam told ValueWalk they had a big moment in March 2020 when the rest of the market was down over 20%. Anson was down negligibly, which gave them a real opportunity while everyone else had their head in the sand.
"We turned on the jets since March 2020," Kassam said. "We've been flying on the right side of the deals, avoided certain sectors, and invested a considerable amount of energy to understand how the development and deployment of vaccines would change the dynamics around the pandemic and the economy. In this environment we were able to find high-quality deals to fund on the long side, avoided danger zones on the short side, and focused on identifying companies with unsustainable business models or those engaging in highly questionable activity."
Anson Investments Master Fund was up 0.8% for December 2021, bringing its full-year return to 45.5%. The Dow Jones Industrial Average was up 20.9% for 2021, while the S&P 500 gained 28.7%, and the TSX Index returned 27.1% in U.S. dollars.
Moez Kassam's background
Kassam grew up in Toronto and attended the University of Western Ontario. He was always fascinated by the markets, and when he was in school, he won the top prize in his first stock market competition. That's when he started to get into the investing field, but he didn't have any money to start trading with.
During the dotcom boom in 1998 and 1999, Kassam was doing a lot of paper trading due to his lack of funds, but then he convinced a friend to loan him money at a 4% interest rate so he could try his hand at investing. Kassam didn't know how he would pay the money back then, but he dove in.
He became so focused on the market that he became aware that he would miss trading opportunities by attending classes. As a result, Kassam shifted all his classes to nights so that he wouldn't miss any trading hours.
At the end of the school year, he paid back the $10,000, and his mother, a teacher, became concerned that he would drop out of school. Kassam promised his mother that he would get his degree, but as he gained more experience, he started managing money for other people.
Since the dotcom boom was going on at that time, Kassam described it as a “crazy time to be in the market, with dramatic fluctuations happening in share prices on a daily basis.” He thought he could start trading for a living immediately after graduating. As a result, he linked up with the U.K.'s Trafalgar Asset Managers, which ran a $4 billion hedge fund.
"I would meet people at conferences, pitching them ideas, and I was doing a lot of work on the short side at that point," Kassam told ValueWalk in an interview. "I put my money to work, and things went well."
Starting Anson Funds
He met Theo Phanos, known from Michael Lewis' The Big Short, and Bruce Winson, whom he started the Anson Investments Master Fund with in 2007. At the same time, Kassam was working with Trafalgar's subadvisor to its North American strategy. He started with a small percentage of a big multi-strategy fund starting with $7 million.
"Everyone was making so much money in 2007 that they all told me they don't need another manager," Kassam said. "But I had a differentiated strategy. I was not doing 'buy long and hold.' I knew how to make money by identifying questionable companies when valuations were at the top of the markets. There was a significant opportunity, at that time, on the short side."
He noted that today, there are a lot of retail investors involved in the markets, including "everyone, their parents and their taxi drivers." Kassam also sees lots of highly questionable companies, such as a biotech company that would put no money into R&D while at the same time sending promotional emails that tell retail investors to buy its stock.
"You might think, 'Why would anyone do this,' but people actually buy it," he said. "Like the guy who sends money to Nigeria, it actually works. It might be only an 0.01% conversion rate, but some people will actually buy it."
Kassam focuses on trading situations where he has a competitive advantage for generating positive returns. In 2008 when everyone else was getting killed in the market, Anson Funds was one of a few funds that broke even, actually putting up performance of 2%. From then on, Anson started to raise even more money, and Kassam continued to come up with ideas, attending idea dinners and conferences to share his thoughts and learn from his peers.
"Long story short, we just kept going, and we're at a point now where the firm's assts are at US$1.5 billion," he said. "The main fund has just under $1 billion, and have spawned new funds that are managed under the Anson umbrella."
One Trade That Changed It All
When asked about one stock that changed how he trades, Kassam pointed to Krispy Kreme Donuts. The company debuted in April 2000 at $23 per share, and by 2003, its stock was up 545%, according to data from Dealogic. Kassam explained his surprise at the extreme response to what was essentially just a donut store.
"It was all the rage, quite like the GameStop frenzy, after the markets started coming back after '99," he said. "What I couldn’t understand was why a donut store was trading at a 70x multiple. And so I tried to articulate why the company was overvalued."
Kassam learned that when looking at the short side of the market, it's easier to focus on questionable companies rather than those overvalued, legit businesses with real growth and a solid team.
Targeting Questionable Companies As Shorts
"If you look at our history, our money is made off shorting companies that… there are really no long investors, just guys associated with an extremely questionable company, some of which are engaged in questionable business practices, have unsustainable business models or are hyper-aggressively promoting their own stock to unsophisticated retail investors," he said. "They're not around a long time... Since 2008 had a rising tide, and valuations went higher and higher as interest rates dropped to zero, people were happy to pay higher multiples."
Kassam noted that market sentiment is always moving onto the next theme, and then it's not so keen on tomorrow.
"NFTs, crypto companies and ICOs have been making money… so when you see that dynamic happening, new market actors, not all of them reputable or capable of delivering, are going to launch ICOs and NFT projects," he said. "So now we're very focused on cannabis. Everybody thought legalization was around the corner in the U.S. We tried to identify companies that really had a shot of making it work, with great management teams and solid business plans, and financing them on the long side, while on the other hand identifying overly hyped companies with questionable managers on the short side."
Biggest Mistake
Kassam's biggest mistake was relating to his shorting strategy surrounding timing of a certain type of short with a cult following. He said Anson Funds started to grow and reached $25 million in 2010 and $500 million by 2015 and 2017. Kassam started to allocate money and started to get into some larger names and short some companies with valuations that didn't make any sense as they continued to rise higher and higher.
"I couldn't appreciate that they had a cult following," he explained. "Tesla, Wayfair, Shopify… They were losing money, but they had real growth, extremely talented founders and management, and a huge following behind them. Trying to identify mispriced stocks in this category was a mistake and led us to move away from our core competency of shorting companies with no revenue, barely any operations, and over-selling their future prospects for a short-term bump in their share price. Focusing on those names has given us a great annualized return and I needed to go back to this strategy."
Kassam pointed out that the correlation of extremely questionable companies to the rest of the market is low because they follow their own path. As a result, focusing on them has been a way for Anson Funds to be hugely successful irrespective of the direction of the wider market.
The fund continues to incorporate short selling overvalued companies as a core strategy, but Kassam is more mindful of how crazy things can get. He looks for catalysts beyond just saying that something is overvalued. He identifies an example of a company about to unveil a product like an autonomous car even though basic diligence identifies that the company doesn’t actually have anything.
Kassam searches out "sell the news" types of events and does a lot of work around the companies he shorts. Sometimes he shorts a company around its earnings date.
Philosophy On Shorting
Kassam feels that he has lived and breathed short-selling. He pointed out that there is a perception among investors that there is a lot of misinformation circulated by short-sellers. However, Kassam noted that anyone who makes a public comment can be held liable for what they say.
Further, whenever questionable companies respond to a short report, their defense is the same old usual statement that the short-seller stands to profit from the report and thus they are “shorting and distorting”. Kassam believes that if any company targeted by a short report had a legitimate issue, they would sue the short-seller for libel, and they would retort on the merits of the report.
Kassam pointed out that 99.9% of people want the market to go up, but he can't complain about short-selling because if it was easy, everyone would do it. However, his success as a short-seller can't be denied.
"Short-selling is negatively correlated to the market, but if the stock market goes down, everybody loses money at the same time," Kassam said. "Everybody is in the same boat… The short-seller always stands out… they live on an island. The market is up like clockwork for 13 years now, and with each year that passes, another short-seller is gone. They don’t want to do it because they can't make any money."
Kassam added that his fund manages various investment strategies, part of which is the ability to generate returns on the long side through its structured financing book, its value long book and an opportunistic trading strategy focused on topical events. However, if the market stagnates or drops, they can make money on shorts.
Kassam's Most Successful Trade
Anson Funds' most successful trade was Genius Brands International Inc (NASDAQ:GNUS), which gave its 2020 returns a sizable boost.
"We were long Genius Brands from its restructuring when cash flows were tight, at which point the stock was at 21 cents a share," Kassam said.
He had been following Genius Brands for a few years before he invested in it. The company focuses on cartoon production, and it is run by Andy Heyward, co-creator of the Inspector Gadget cartoon. Kassam described Genius Brands' cartoon library as "unloved" but "interesting." The company also has a cartoon with Warren Buffett to teach kids about investments. Genius Brands is also the maker of the Llama Llama cartoon with Jennifer Garner.
"I believed in the quality of the content and the content producers, so I provided them with financing to get into production. We had a few difficult years before they gained traction in the market, but in 2020, it took off."
Robinhood has a leaderboard where it lists the top 10 actively held names. Kassam said Genius Brands became a self-fulfilling prophecy as more and more people traded it, pushing it higher and higher. The company made it to the top of the list and peaked at $700 million to $1 billion per day in trading activity. Just three months earlier, Genius Brands was only trading $400,000 worth of activity daily.
"It was one of those stocks everybody talked about," Kassam said. "What they saw in GameStop and AMC, this was one of the names right there with it. We believed in the founder. It was of course partially luck, as all successful trades our, but it also involved us having the courage of our convictions and staying in the trade. And this made it the largest profit-generating trade in our history."
On SPACs
Kassam has also been involved in the SPAC market, pouring $600 million to $700 million into SPACs. He described himself as "a big believer early on" in 2020, but not in 2021. He remains confident in the SPAC model and the free options it creates. He also likes SPACs because until they are de-SPACed, he has the option to sell his position back to the company without much risk.
While some short-sellers have argued that the SPAC market attracts scams frequently, Kassam believes the real issue facing the market is overvaluation. He noted that many SPAC sponsors are very well-known, and they want to make sure the company they merge with is a real company.
"Whenever there's hype, there's such a rush to get companies identified and married via SPAC," Kassam explained. "A lot are pushed quickly, so valuations are not held to regular standards. It's the same thing in the IPO market. It's a function of supply and demand. If you don't give us this valuation, we'll go to another SPAC. The key from the investor perspective was to focus on quality at the company level and at the SPAC promoter level," Kassam added. "Focus on the A+ talent, and avoid the fast followers and the hustlers.”
A Passion For Food And Wine
As far as hobbies, Kassam's passion in life other than trading and investing is food and wine. He is part of Canada's 100 Best and serves as a sitting judge for the top restaurants in the country.
Although there is a sizable disconnect between food and finance, Kassam is always helping chefs and restaurants with their business plans. He describes himself as being "obsessed" with food. When he isn't doing stock market stuff, he serves as the chief food officer for Diner en Blanc, where everyone wears white and brings their own chairs for a picnic.
Kassam also helped bring the Michelin Group to Toronto. He says he "lives and breathes the food world." He also has a large, young family with three girls ages five and under.
Kassam is currently reading The Key Man, the story of Abraaj, a company founded in the Middle East by Arif Naqvi. He fooled numerous investors, including Bill Gates, and Kassam described Abraaj as "the Enron of the Middle East and Africa." It turned out to be a massive scam, and whistleblowers worked with Wall Street Journal reporters to bring it down.
Kassam's Inspiration: Dan Loeb
Kassam looks up to Dan Loeb and the rest of the Third Point team. He explained that Loeb identifies themes and has been incredibly successful. The Third Point chief was active on the short side until he dropped that side after 2010.
"It was smart of him to rebalance on the long side in a post global financial crisis world where QE was abundant," Kassam said. "You can make more money with less risk on the long side than the short if you play your cards right, but that takes real skill. He has the ability to identify the next hot theme … in regards to tech, focusing on autonomous driving [and] cybersecurity. He’s got a great analytical mind and the ability to zero in on what’s going to work. "
Kassam appreciates Loeb's ability to articulate what he does and adapt as his fund grows. Kassam explained that what worked when a fund is $5 million or $6 million or even $20 million isn't the same strategy that will work when the fund is $1.5 billion.
He pointed out that Loeb has adapted as he has grown Third Point from a small size to a large-scale fund and that he has been able to compound the fund's returns in the current market.
Anson's Long-Term Performance
Since Anson's inception in 2007, the fund is up 739.2%, compared to the Dow's 290.4% return, the S&P's 326.9% return, and the TSX's 91.6% return in U.S. dollars. Anson Funds was ranked number seven in BarclayHedge's Top 10 performing long/ short equity hedge funds for three-year compound growth from 2018 to 2022. The Anson Investments Master Fund was named Best Equity Hedge Fund Over $500 million by Hedgeweek in 2021.
Of note, Anson's Master Fund was up 1.4% in November 2021. Meanwhile, the hedge funds reporting to With Intelligence's Eurekahedge Hedge Fund Index had their worst month since the pandemic officially hit the U.S. markets in March 2020.
The Eurekahedge index was down 1.18% on an equal-weighted basis and 1.88% on an asset-weighted basis. With Intelligence cited the economic uncertainty over the omicron variant of COVID-19 as the reason for the lackluster November return for most hedge funds.
This post first appeared on ValueWalk Premium
