Horseman Global: Short Retail REITs

Horseman Global, which was up until recently the world’s most bearish hedge fund, before it suddenly reversed course and capitulated on bearish bets earlier in January has made terrible start to 2017. The Horseman Global fund is down 7.7% year-to-date after losing 1.1% in March thanks to a poor performance from the bond book and long book. Ironically, for the period the short book (or what remains of it) chalked up the best performance. US retail, REITS and auto shorts all performed well.

On a net basis, the whole equity book was flat. Excluding equities, all of the portfolio’s losses came from bonds and as a result, Russell Clark, chief investment manager of the Horseman Global fund, writes in the fund’s March update that all long dated bunds have now been disposed of. Short dated bunds remain on the book.

 

Horseman Global: From short to long

Horseman Global: Who Will Buy When Passive Falls Out Of Favor?

In the manager’s commentary section of Horseman’s March fund update, Russell Clark discusses how the rise of passive investing has benefited the Horseman fund. However, rather than focusing on the traditional argument that passive investing is good news for active investors because it throws up more opportunities, Russell concentrates on the positive impact ETFs are having on short selling. Specifically, he writes:

I am not a particularly big fan of the idea that markets are efficient. In fact I think people who believe this have never spent any time working in investment management. Everyone in the industry has seen how investment fads wash over the industry from time to time, only to wash out again as returns begin to disappoint. Making money is hard, and most investment managers, either overtly or discretely will seek to have momentum in their strategy. I would say that almost all investors have realised that this is a big part of hedge fund strategies, and have increasingly looked to cut the middle man out on this. For me this has been a big part of the rise in ETF and other passive funds. The rise of the ETF has certainly put pressure on the active fund management sector to cut its fees. There are complaints from some quarters about it being harder to short sell as flows of money push up stocks.

“I like to short sell, an area that ETFs have so far failed to have any meaningful success. I like to short sell in size, but to not use index linked futures and options. So I need to short a number of stocks in a sector to get my short exposure. The growth in ETF and passive investing has been a godsend in this matter. Not only do they give you full exposure in what they own, you can also pretty closely track flows into and out of the funds. This has greatly simplified one of the big questions I always ask myself before short selling anything – who is going to sell this to force it down? The answer now, for almost all stocks, are ETFs.”

Russell goes on to describe what can only be called a short passive strategy. The best sector for this strategy at present is the US REIT sector, currently the biggest short sector for the Horseman fund today. Russell notes that retail REITs have the highest exposure to ETFs of any sector, which makes them the perfect passive short. “Bloomberg allows you to find the biggest ETFs and open ended funds which are invested in US Real Estate Sector,” Russell writes, describing how to find the best passive short opportunities. He continues “the top 28 funds have total assets of 187bn USD, of which 13.3bn USD invested in Simon Property Group, that is 24% of Simon’s market cap.” When all passive funds weights are added together, around 50% of Sion Property Group shareholders are passive. The big question is, who will become the buyer if these funds start to see redemptions?

The biggest short sector in the fund are REITs. In the US, they are mainly retail REITs, and there are two reasons for this. One is that we have guaranteed sellers in the Japanese US Reit fund (see note entitled ‘Japanese US REIT Funds and the Buy Case for Yen’). The other reason is the appalling performance of the major tenants (see note entitled ‘Mall Rats’). However, as an aside, I like them as a short area as they have the highest exposure to ETFs of any sector. Bloomberg allows you to find the biggest ETFs and open ended funds which are invested in US Real Estate Sector. The top 28 funds have total assets of 187bn USD, of which 13.3bn USD invested in Simon Property Group, that is 24% of Simon’s market cap. However, Real Estate passive funds are not the only passive fund invested in Simon. When all passive funds weights are added together I get over 50% of Simon Property Group shareholders are passive. I wonder who will become the buyer if all these funds start to see redemptions if there are some problems in US commercial real estate?

Russell concludes his note with the following summary:

“Fund management and investing are like all industries, subject to cycles. The long bull market in passive investment has made them wilfully blind to the liquidity risk that they are running. Passive investments are concentrated in the US market. The US bull market is getting long in the tooth, while the emerging market bull market is just starting. Your fund remains long emerging markets, short developed markets.”