For a hedge fund that sees the world as a seething cauldron of cataclysmic risk, 2016 should have been a banner year. First there was China's surprise devaluation, then the shock of Brexit, and, finally, Trump. Following each of the first two events, the exceptionally bearish Horseman Capital Management pocketed nice gains. Brexit bets alone pushed Horseman up 7.4 percent in the week after the big referendum.
Given everything we knew in the run-up to the U.S. election, then, it would seem the British hedge fund was positioned just right for markets to be blindsided by a Trump victory: net short -84 percent at the end of October, following a campaign season in which every good headline for the Donald took a dump on stock prices.
You can see where this is going:
The flagship hedge fund at Horseman Capital Management Ltd. was one of the world’s worst-performing hedge funds last year, posting a big loss in the wake of Donald Trump’s U.S. election victory.
London-based Horseman runs about $2 billion in assets. Its main $1.7 billion Global strategy fund lost 24% through Dec. 28, according to numbers sent to investors in an email and reviewed by The Wall Street Journal.
For the sake of schadenfreude, imagine the elation Horseman's Russell Clark must have felt as the sun rose over London on November 9. Disbelief was ubiquitous. Equity markets worldwide were falling off a cliff. Those shorts were looking mighty nice.
Needless to say, what happened over the next few weeks – likely the largest-ever post-election rally – erased whatever joy the world's tumult must have brought Clark for a few hours after the votes came in. Soured shorts cost the fund a total of around $330 million in the last two months of the year, the Journal calculated.
For a time Clark held out some hope, though. In mid-November, he suggested to clients that market reactions may change as the election results sank in. “After Brexit, being short equities and long bonds was a fantastic trade for a week or two, but then reversed quickly after, causing severe pain for those that had reacted to the market quickly,” Clark wrote. “I think the Trump win has seen many investors sell defensive positions and buy cyclical positions. I suspect they will come to regret that. Your fund remains long bonds and short equities.”
Horseman has plenty of company. Most recently, it was Larry Summers hulking out over Trump's economic plans, warning of “enormous uncertainty” that had yet to be appreciated by the markets.
Who knows whether he's right! So far no amount of downbeat news has really shaken the Trump rally. You can call it animal spirits, you can call it a new market narrative, whatever. To Horseman, it's just a short squeeze.