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 Investors who make a living betting that stock prices will fall are
in a position to profit handsomely as the U.S. equity market sinks,
with its biggest weekly plunge in more than two years last week and
continuing to decline so far this week.
After lean years in which short-biased funds tracked by eVestment
have posted double-digit losses every year since 2008, some were
able to post among the investment industry's best returns in
September and may well have done even better in the first two weeks
of October.
"Short-selling is the worst way to make money but recently I've had
a change of heart and I think there are enough valuation obscenities
to create an opportunity," said prominent bear William Fleckenstein,
who shuttered his short-only fund in 2009, but continues to invest
money through another portfolio. "It felt like putting on an old,
comfortable leather jacket."
The short funds - who borrow shares and then sell them in hope of
buying them back at a lower price - are hopeful that the bull market
that has lasted more than 2,000 days, and has not experienced a 10
percent correction in three years, may be coming to an end.
And that's potentially bad news for names that shorts have had in
their crosshairs for ages - the likes of electric car company Tesla
Motors Inc or online video company Netflix - stocks some investors
see as overvalued.
Equity markets now look vulnerable, thanks to the winding back of
U.S. Federal Reserve easy money policies, concerns about weak global
economic growth, a plunge in the oil price, and fears about the
spread of the Ebola virus.
Fleckenstein, who along with other notable short sellers, such as
Jim Chanos, Doug Kass, and David Tice, built a reputation for
successfully betting against companies that crumbled, said he put on
aggressive short positions recently for the first time in five
years.
Kerrisdale Capital's Sahm Adrangi, who presented his long-researched
short bet against Globalstar Inc <GSAT.A> last week and sent the
satellite communications company's stock price tumbling 42 percent,
said it was easier to get others in the market to listen to short
selling ideas when the whole market was sliding.
"When short sellers play a more activist role there are times when
markets just shrug it off but then there are times like now when
people pay more attention," he said.
He has also shorted Tesla, which has fallen 17 percent in the last
month, and personal camera maker GoPro which has tumbled 20 percent
in the past five days.
REBOUND IN SEPTEMBER
Short-biased mutual funds tracked by Lipper climbed 7.13 percent in
September while hedge funds that focus exclusively on selling stocks
short inched up 1 percent last month, Hedge Fund Research data show.
Some hedge funds fared more poorly than mutual funds because the
hedge funds were not fully invested, analysts said.
Most other funds, be they stock mutual funds or hedge funds, were
knocked lower in the last few weeks as the Standard & Poor's 500
index has plunged about 7 percent in less than a month.
For example, Robert Citrone's Discovery Global Macro hedge fund was
off nearly 3 percent in the first week of October, an investor in
the private fund said. Claren Road, the hedge fund owned by private
equity giant Carlyle Group, lost roughly 5 percent in the first week
of October, hurt by its bet on housing finance companies Fannie Mae
<FNMA.OB> and Freddie Mac, added an investor.
"If you were just outright short almost anything during the past
week, you've done well," said Nicholas Young, a portfolio manager at
Conventus Capital, "But many hedge funds are long some names and
short others with their net market exposure near neutral," he added.
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One popular short position among hedge funds is General Motors,
according to Goldman Sachs. The company has been plagued by vehicle
recalls after a number of deaths were linked to faulty ignition
switches, and shares are down 27 percent on the year.
Kass, who runs hedge fund Seabreeze Partners Management, is shorting
GM and rival Ford Motor Co, whose shares have slipped 12.2 percent
in 2014 even as auto sales figures have been strong. Kass said he
has been increasing his auto industry shorts because of the
deterioration of the European car market coupled with his view that
U.S. auto production is reaching a peak.
Blue chips like General Electric Co, which has been building its oil
and gas equipment and services arm, and oil major Exxon Mobil Corp,
are also among names that some hedge funds are betting against.
Those names tend not to fit a short-seller's profile, but they've
worked - both have posted double-digit losses in 2014. The recent
slump in oil prices has hurt their shares.
Names investors associate with big short bets like Tesla and Netflix
have only recently suffered reversals. Netflix is still up 22
percent on the year, and Tesla has gained 51 percent so far in 2014
– though it is down nearly 20 percent in the last month.
With prominent investors bracing for the selling to continue,
additional evidence of weakness in the European economy, the
widening of the Ebola outbreak or more declines in oil prices, could
further sap buying interest.
Whether another dose of gloom will benefit so-called short-sellers
by triggering new asset flows remains to be seen.
Among the world's roughly 10,000 hedge funds, there are only about
two dozen dedicated short sellers and most are small with the entire
group overseeing only about $2.8 billion in assets, a small fraction
of the hedge fund industry's $3 trillion.
Among the short-focused mutual funds is the $450 million Federated
Prudent Bear Fund, which gained 6.33 percent in the last month and
Leuthold Weeden Capital Management's $81 million Grizzly Short Fund
which climbed 11.42 percent in the last month.
These funds, which have a history of taking in fresh money during
tough times, have already seen $250 million in new inflows between
April and the end of August, said eVestment's head of research Peter
Laurelli.
Other hedge funds, which can hold significant short positions, also
adopted a more cautious stance. Net long positions, for example,
were cut to 48 percent at the end of August from 58 percent in
December 2013, eVestment data shows. Credit Suisse data shows funds
have sharply reduced their long exposure as the market has slumped.
(with additional reporting by Jennifer Ablan and David Gaffen;
Editing by Martin Howell)
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