Saturday, January 2, 2016

Hindsight Capital

Nice article from John Authors: some excerpts,

[A]s the year draws to an end, the Long View can return to the offices of Hindsight Capital.

For the uninitiated, I have been meeting Hindsight’s managers annually for many years. They regularly use the one strategy guaranteed to beat all others: hindsight. At the beginning of the year it puts on only trades that will prove to make money.

Such clairvoyance could lead to limitless riches, so a few rules are imposed. It makes no bets on single stocks, no use of leverage, and can make no trades during the year. It is also obliged to show that there was a reasonable rationale for what it did as of January 1 — betting on unforecastable natural disasters is out.

It can, however, profit from securities falling in price by selling short. That proved important this year.

Here, then, are the trades that — with hindsight — would have made money this year.

The US loves cheap oil

As the year started, energy companies had barely sold off, and there was a widespread belief that the oil price would soon rebound. It was an obvious opportunity to short energy stocks, and to pour money into the companies that would benefit from the dividend cheaper oil prices would create for consumers. [..] That dividend is still not as great as hoped, but buying the S&P 500 consumer discretionary index and funding it by shorting the energy index would have made 43.4 per cent.

China stalls

Many could see problems coming for China, as it tried to wean itself off huge doses of credit and an economy based on manufacturing exports. This would lead to lower commodity prices, which create deflation, in turn supporting the price of long-dated bonds (which are vulnerable to rising inflation).  Hindsight shorted the Bloomberg industrial metals index (down 29.7 per cent), and put the proceeds in the Bloomberg Effa 7-10 year Treasury index, which was up slightly for the year. Gain: 42.5 per cent.

Oil keeps falling

Hindsight foresaw the deal with Iran, which would open its supplies to the world, and the utter loss of discipline for Opec. Shorting the entire energy complex (including natural gas, now in a glut) through the Bloomberg energy index (down 42 per cent) and parking the proceeds in long Treasuries yielded 69.4 per cent. [..]

Spot the bubble

As 2014 ended, the long US bull market appeared to be reaching its last stage. Typically at the end of a bull cycle markets grow narrower, and a few exciting large-cap stocks swamp all else. Hindsight devised two trades to capitalise. First, it went long an equal-weighted basket of the Fangs — Facebook, Amazon, Netflix and Google (up 73 per cent), paying for it by shorting the equal-weighted S&P 500 (down 3 per cent for the year). This made 82.8 per cent.

Second, it used a market value-weighted index of the Nifty Nine — which added Priceline, Salesforce, Starbucks, Microsoft and Ebay to the Fangs, and gained 62 per cent — funding it with a short on the Russell 200 index of smaller companies, which predictably sold off by 5.7 per cent in a dying bull market. This bet on a bubble made 72.6 per cent.

Commodity importers beat exporters

A fall in commodities — which Hindsight Capital foresaw — benefits some at the direct expense of others. Japan, with Abenomics in full sway and the Bank of Japan providing another dose of stimulus as the year began, was an obvious long.  Fund a position in the Nikkei 225 Topix index (up 9.6 per cent in dollar terms), with a short in the MSCI Latin America index — which, raddled by political problems and desperately dependent on commodities, fell 31.2 per cent — and the gain was 56.7 per cent.

Clean energy triumphs

The writing was on the wall for “stranded assets”, as universities and endowments divested from coal the world over. Clean energy was hindered by the fall in the oil price but registered gains. Selling short the Stowe Global Coal index (down 60 per cent), and reinvesting the proceeds in the S&P Global Clean Energy index (up 1 per cent) delivered a total return of 156 per cent.

Crisis in Greece, but no longer the eurozone

Greece entered the year plainly unable to pay its debts, and with its politics getting angrier. But the rest of Europe’s banks had removed their exposure. For the eurozone a sovereign debt crisis had morphed into a problem of slow and stagnant growth. So it was a good bet that Greek stocks would take a pounding, while countries recently shunned would continue to recover. Shorting the FTSE Athens large cap index (down 32 per cent), and putting the money into the FTSE-MIB Italian index (up 12.5 per cent) delivered a gain of 65.7 per cent.

Hindsight was allowed one mid-year trade (as in the past), and made a killing in the credit market. Buying protection on the credit default swap, and selling out of the position on June 30, as the crisis reached a head, more than tripled its money. Turning round immediately and selling protection, seeing that Greece would eventually have to swallow whatever the EU granted it, would have tripled it again. These two trades netted Hindsight Capital 1,573 per cent.

Short gold, long bitcoin

As deflationary sentiment roiled the world, it was a good bet that the bear market in gold would continue, as it did (down 11.2 per cent). Meanwhile, fintech — the hope that technology will nurture new ways of doing finance — is a phenomenon of the moment. Bitcoin came back to earth in 2014; there was every chance it would rebound, as it did (up 43.3 per cent). Sell an ounce of gold to buy bitcoins at the beginning of this year, and you can now buy back 1.62 ounces.

Is this a fair benchmark for your fund manager? Of course not. In the real world we have to hedge against the risk that we are wrong. But it only took a few central insights to make most of these trades.

No comments:

Post a Comment