Horseman Ups Chinese Financial Shorts Amid “Inevitable Financial And currency crisis”

Russell Clark, investment fund manager at Horseman Global Fund, is testing numerous red lines. One of these tests is occurring regarding the fund’s second worst drawdown in history. As one of the more consistent market bears who voices a decidedly non-consensus viewpoint that, at times, points to impending doom. Clark, with US$1.9 billion under management, looks a black future in the face with an odd sense of humor. It is unknown if his British background growing up amid Monte Python might be cause for his holy quest: The search for a grail that is a stock market crash. In the Horseman Global Fund December letter to investors reviewed by ValueWalk, Clark, ending 2016 as the third worst performing investment on HSBC Hedge Weekly platform, explains his negative performance exposure by exposure. But in reality, just taking a look at the Long / Short ratio turned on its head and understand the gory picture.

Anecdotally, from looking at dozens of Q4 letters it appears most hedge funds made or break their year within just a few weeks at the end of 2016. Many long biased funds made the majority of their gains in Q4 and with short biased funds like Horseman  much of the downturn came towards the end of the year.

Horseman Global Fund is not emotional about his politics and it doesn’t impact his gloomy worldview

The visual on the top banner of the Horseman December letter says it all. A bull’s horns gouging the matador, with a left horn tip apparently on a trajectory to impale a rather personal body part. This describes Horseman’s year: down -24.03% for 2016, and 7.81% in December on Trump trend aftermath, Clark has been mutilated by a market bull that some fund managers are saying defies logic.

In the wake of the Trump rally that some managers bet with and some against the surprise victory. George Soros, for instance, proved that some fund managers have a high correlation between their political persuasion and performance. Violating a rule about emotion guiding trading decisions, Soros possibly let his attachment to a political cause apparently influence his market outlook. How could anyone think a Trump win would correlate to a market rally? He wasn’t alone among Democrats for being in shock and having a violent emotional reaction. Soros, like Carl Icahn and former associate Stanley Druckenmiller, all bet on the election. Soros lost nearly $1 billion, the other two profited.

Clark, however, isn’t a bear due to the election of Trump based on political ideology. Reading his analytical prose, he was expecting a market crash due to other issues. The Trump election, he says, has changed the market focus. The extensive short positioning protecting against a China crisis reversed in the election’s wake. Clark isn’t so much rooting for one side or another, but rather pointing to changing market trends and how this caused the fund to drop in value so precipitously in December.

Clark expects China to have a currency or financial crisis, potentially with both occurring simultaneously, a logical correlation thought given the correlation among fundamental performance drivers. In the wake of the crisis, Clark molds his somewhat apolitical view into a trade. Clark is preparing for a Chinese crisis noting that he is closing shorts to make room for shorting more Chinese financials. Deflation will follow, with the commodity markets being particularly hard hit. Clark is using cause and effect-based modeling at and has logical if / then dots connected. The most significant input variable, however, is the trade timeframe. When will this loudly predicted China crisis occur? Therein lies the real strategic challenge.

Specifically, Clark states:

One of the reasons that I run the fund the way that I do is that I do believe that a Chinese financial or currency crisis (probably both at the same time) seems inevitable. The implications of this to me have been that commodities would do badly, deflation would become prevalent, and exporters to China would suffer. Given the unreliability of Chinese data, I feel it right to be bearish on China as long as its banks continue to trade sideways to down, as they have done since 2011.

Horseman Global Fund – Far from alone in sharing concerns over the world’s largest controlled society entering the “free world”

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