The S&P 500 versus China A Shares and the “Mr Pink” of Global Macro

The S&P 500 versus China A Shares

Since 2013 (use ANY POINT within 2013 as your starting point), guess which market has outperformed? The S&P 500, or the Shanghai Composite Index? My guess is that many Americans and Europeans would (incorrectly) guess “S&P 500″:

ycharts sse vs sandp level

ycharts_chart

Questions and Comments:

  • Note how the SSE underperformed the S&P500 for most of the 2013 – Present period… the ‘shift’ / ‘inversion’ from relative underperformance to extreme outperformance occurred fairly recently.
  • There’s only one person I know who was screaming and yelling (and positioning) Long China, Short USA equities since 2013…let’s call him Donald Duck. I think it’s fair to say he’s the “mr pink” of global macro…it may even be appropriate to call Dan Loeb the “Donald Duck” of event-driven investing. Donald Duck has been pounding the table on going short USD over the last 1-2 quarters. That trade has looked ‘stupid’ until recently. Donald Duck has gotten quite a few other major trades / turning points correct (as well as some very wrong). I don’t fully understand the Duck’s “sausage-making” process, but the result seems to be quite tasty.
  • I told Donald Duck back in 2013/2014 that I felt that the better way to express ‘long China” would be to hand-select a basket of US-listed (and potentially other foreign-listed) Chinese stocks, as the A shares, and mainland stocks would be ‘dead money’. That is, to go about “long China” via an Long/Short China approach, or maybe a long-only approach (but with extremely tight due diligence, careful security selection). Donald Duck, however, expressed his preference for the A shares / indices, (I think) given their lack of focus/expertise on individual company analysis/due diligence. Going long select US-listed Chinese stocks looked smarter in 2013 and through most of 2014 (especially if one avoided the NQ Mobile’s of the world, or even went concurrently short them!) versus going long A shares and/or mainland shares…until recently.
  • Why has the SSE outperformed the S&P500 within the last 1-2ish quarters? Why and how long might this trend persist? Why and how might this trade ‘unwind’ ? (I am, as I write this, considering a ‘trade first, analyze later’ approach, i.e. start building a short China, long USA pair trade)
  • What are some fund flow and other considerations between China main-land listed shares, versus China company shares listed elsewhere?
  •  If one doesn’t care about global macro, what might the implications be for single-stock picking, sector investing, etc.?

“Sweep streets so well that all the hosts of heaven and earth will have to pause and say: Here lived a great street sweeper who swept his job well.” MLK

“If it falls your lot to be a street sweeper, sweep streets like Michelangelo painted pictures, sweep streets like Beethoven composed music, sweep streets like Leontyne Price sings before the Metropolitan Opera. Sweep streets like Shakespeare wrote poetry. Sweep streets so well that all the hosts of heaven and earth will have to pause and say: Here lived a great street sweeper who swept his job well. If you can’t be a pine at the top of the hill, be a shrub in the valley. Be the best little shrub on the side of the hill. Be a bush if you can’t be a tree. If you can’t be a highway, just be a trail. If you can’t be a sun, be a star. For it isn’t by size that you win or fail. Be the best of whatever you are.” – Dr. Martin Luther King Jr.

“Inhuman Volatility”

A certain man with a healthy dose of mojo is believed to have coined/popularized the term ‘inhuman volatility’. The term seemed quite appropriate to describe recent action in oil land… then the Swiss Franch happened. Today. I’m writing this post for my own reference, and for posterity’s sake. I may followup and update this post with graphs/tables to illustrate the historical rarity of today’s move(s).

Considerations for 2015

Critique of my ‘Considerations for 2014′, as written originally here http://thelongshorttrader.com/2013/12/28/946/ )

  • Consider sectors and strategies that were out of favor in 2013 – This was OKAY… I was cryptically referring to single name short selling as the out-of-favor strategy. It ended up being an OKAY strategy for 2014.
  • Gold and Miners – YES
  • Endogenous vs Exogeneous – YES (Ebola, Ferguson, HK protests, etc)
  • Go Long Active (vs. Passive) Management – OKAY… as a whole, active did poorly, but there were some notable alpha bright spots
  • Credit/Rates – OKAY
  • Bitcoin ImplicationsEARLY/WRONG
  • Russia? Turkey? – YES
  • War risk creeping – YES

Considerations for 2015

  • Volatility
  • Us equities market: chop-fest / consolidation
  • The bubble in formation is in bonds, not equities. “first thing I do when i see a bubble is I buy” – the palindrome
  • EURUSD parity is in sight within 24 month
  • Single-name short selling: 2013 was disastrous, 2014 was okay, 2015 okay/meh. The few years after a disastrous year tend to be okay (4/N)
  • Watching, but not sure what to make of for 2015: (1) Biotech (2) Shareholder activism (3) Mainland China (6/N)
  • Gold:2013, Oil:2014, ???:2015

“You can’t connect the dots looking forward you can only connect them looking backwards.” – Steve Jobs

Stanford Commencement Address 2005:

“You can’t connect the dots looking forward you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something: your gut, destiny, life, karma, whatever. Because believing that the dots will connect down the road will give you the confidence to follow your heart, even when it leads you off the well worn path. And that will make all the difference.” – Steve Jobs

http://news.stanford.edu/news/2005/june15/jobs-061505.html

On Taking Losses and the Value of Survival: A Quick Look at 1999-2000

”The moral of this story is that irrational markets can kill you,” said one Wall Street analyst who has dealt with both men. ”Julian said, ‘This is irrational and I won’t play,’ and they carried him out feet first. Druckenmiller said, ‘This is irrational and I will play,’ and they carried him out feet first.”

It seems the ability to take losses, and survive to fight another day (and preserve swagger/confidence amidst losses) is quite critical:

  • During the first part of 1999, Soros funds were betting big against Internet stocks, in keeping with Mr. Soros’s view that the Internet craze would end badly. As that craze instead kept gathering force, the Quantum Fund found itself down 20% by last July.
  • [They hired a tech pm and changed strategy] The Soros funds bought these [i.e. internet] stocks and selling short some Old Economy stocks. It worked: The Quantum Fund came all the way back to finish 1999 up 35%.
  • Though he did a bit of selling at the beginning of 2000, he held on to most of those inflated tech stocks, betting that “the Nasdaq rally was in the eighth inning, not the ninth inning.”
  • So when the hurricane hit in mid-March 2000, the Soros funds were leaning the wrong way: holding lots of tech stocks and shorting the Standard & Poor’s 500 and Old Economy names such as Goodyear and Sears. The market got so volatile it was hard for traders even to figure out their exposure.
  • In just five subsequent days, the Soros firm’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss.
  • By the end of April 2000, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%.

It’s not clear how the Soros funds performed by year end 2000 (or 2001), but the above from http://www.colorado.edu/economics/courses/econ2020/4111/articles/soros-fund.html seems like an excellent read, for the purposes of understanding taking losses (as soon as possible).

 

”The moral of this story is that irrational markets can kill you,” said one Wall Street analyst who has dealt with both men. ”Julian said, ‘This is irrational and I won’t play,’ and they carried him out feet first. Druckenmiller said, ‘This is irrational and I will play,’ and they carried him out feet first.”

http://www.nytimes.com/2000/04/29/business/another-technology-victim-top-soros-fund-manager-says-he-overplayed-hand.html

 

How the Soros Funds Lost Game Of Chicken Against Tech Stocks

THE WALL STREET JOURNAL – May 22, 2000

NEW YORK — For months, through late 1999 and early 2000, the Monday afternoon research meetings at George Soros’s hedge-fund firm centered on a single theme: how to prepare for the inevitable sell-off of technology stocks.

Stanley Druckenmiller, in charge of the celebrated funds, sat at the head of a long table in a room overlooking Central Park. Almost as if reading from a script, he would begin the weekly meetings with a warning that the sell-off could be near and could be brutal. For the next hour, the group would debate what signs to look for, what stocks to sell, how fast to sell them.

“I don’t like this market. I think we should probably lighten up. I don’t want to go out like Steinhardt,” Mr. Druckenmiller said in early March as the market soared, according to people present at the time. He was referring to Michael Steinhardt, who ended an illustrious hedge-fund career in 1995, a year after suffering big losses.

Mr. Soros himself, often traveling abroad, would regularly phone his top lieutenants, warning that tech stocks were a bubble set to burst.

For all this, when the sell-off finally did begin in mid-March, Soros Fund Management wasn’t ready for it. Still loaded with high-tech and biotechnology stocks and still betting against the so-called Old Economy, Soros traders watched in horror when the tech-heavy Nasdaq Composite Index plunged 124 points on March 15 while the once-quiescent Dow Jones Industrial Average leapt 320 points. In just five subsequent days, the Soros firm’s flagship Quantum Fund saw what had been a 2% year-to-date gain turn into an 11% loss.

“Can you believe this? This is what we talked about!” cried a senior trader amid the carnage. Others on the firm’s gloomy trading floor busied themselves calculating how much they had lost by aping Soros investments in their own accounts.

Aside from an April 28 news conference about the firm’s agonies and brief interviews afterward, the secretive Mr. Soros and Mr. Druckenmiller, long his No. 2, have said little about the period leading up to the humbling disclosure of the problems. An account pieced together from interviews with a dozen Soros insiders and managers of other hedge funds — private pools of investment capital — shows two longtime friends and colleagues increasingly at odds until it all became too much.

As the losses piled up, tension inside the firm grew, with Mr. Soros second guessing the traders who had made him billions of dollars in the past decade. Soros executives say they overheard heated arguments, as Mr. Soros pressed Mr. Druckenmiller to bail out of some swooning Internet stocks before they sank even further, while Mr. Druckenmiller insisted that the funds hold on.

During the worst of this period, it happened that the Soros offices were consumed by a powerful burning smell as electrical work on the floor above kept starting small fires and setting off deafening alarms. The smoke and racket and the dizzy headaches they caused seemed “like a divine message,” recalls one Soros executive of the bizarre office scene. “We almost wished it would burn down.”

By the end of April, the Quantum Fund was down 22% since the start of the year, and the smaller Quota Fund was down 32%. Mr. Soros had stated in a 1995 autobiography that he was “up there” with the world’s greatest money managers, but added, “How long I will stay there is another question.” Now came an answer. Both Mr. Druckenmiller and Quota Fund chief Nicholas Roditi resigned. Mr. Soros unveiled a new, lower-risk investing style — completely out of character for him — and conceded that even he found it hard to navigate today’s murky markets.

“Maybe I don’t understand the market,” a reflective Mr. Soros said at the April 28 news conference. “Maybe the music has stopped, but people are still dancing.”

Messrs. Soros and Druckenmiller are just the latest legendary investors whose reputations have been affected by this unusual market. Two others, Warren Buffet and Julian Robertson, suffered for not embracing the late-1990s fads of tech stocks and momentum investing, as those approaches proved winners while blue-chip investing languished. Mr. Buffett stuck it out and has seen his Old Economy stocks make something of a comeback. But Mr. Robertson gave up on his Tiger Management hedge fund in March — just as the winds were shifting.

No pedestal was higher than Mr. Soros’s. A Hungarian refugee from the Holocaust, Mr. Soros, now 69 years old, started as a stock-picker in the late 1960s, graduating to “macro” investing, or betting on the broad trends that move stocks, bonds and currencies across the globe. His style was to wait for big changes in the markets, then take advantage with aggressive moves.

He turned the reins of Soros Fund Management over to Mr. Druckenmiller in 1989 to concentrate on philanthropy, though he continued to keep close tabs on the funds. The firm continued to rack up huge gains, creating awe among competitors. Its funds grew so powerful, using borrowed money to magnify their results, that their investments moved markets, and their giant bets could be self-fulfilling.

In the summer of 1992, it became known that Soros funds were selling the British pound short, betting on a decline. Hearing this, other investors quickly started doing the same. “We didn’t like the pound either, but when we heard that Soros was selling, we reinforced our positions,” recalls Ezra Zask, who made several million dollars from the trade for his own, smaller hedge fund. Such piggyback trading helped Soros funds rack up $2 billion in gains and earn Mr. Soros the label of “the man who broke the Bank of England.”

Just a hint of what Soros funds might be doing had impact. One morning in the summer of 1993, Gary Evans, then head of emerging-market bond trading at Kidder, Peabody & Co., heard that Soros funds were buying Peru’s currency. He ordered his traders to buy Peruvian bonds, barking that “Soros is getting in — something must be going right there.” Peru’s currency rallied, and Kidder’s bonds jumped about 500% in six months.

The rumors didn’t even have to be true. In late 1997, Hamburg Tang, sitting on a Wall Street trading desk, began getting panicked calls from currency traders saying the Quantum Fund was attacking the Malaysian ringgit. Mr. Tang’s group held more than $100 million in bonds of Malaysian companies, and he cursed Mr. Soros under his breath as they fell steadily for a month, Mr. Tang recalls. Mr. Druckenmiller has since said that the Soros funds actually were buying, not selling, Malaysia’s currency during that time.

Beginning a couple of years ago, though, this outsize influence began to wane. As global markets swelled, Soros assets — even at the $22 billion they then totaled — no longer could move markets so easily, nor necessarily give the firm access to the best information. Power shifted toward money managers such as Janus Capital, once a third-tier mutual-fund group but now a huge one because of its hot performance.

And the Soros funds had some fumbles. They have lost more than $1 billion in the past two years betting that Europe’s new common currency would rise. Instead, the euro has fallen 24% since its introduction Jan. 1 last year. In addition, despite their big-picture focus, the Soros funds haven’t profited from the doubling of world oil prices over the past year or so.

But tech stocks proved their Waterloo. During the first part of 1999, Soros funds were betting big against Internet stocks, in keeping with Mr. Soros’s view that the Internet craze would end badly. As that craze instead kept gathering force, the Quantum Fund found itself down 20% by last July. Mr. Druckenmiller, who was concentrating on investments such as currencies, took back the reins of the stock portfolio. But, calling himself a “dinosaur,” he looked for help.

`Mr. Druckenmiller recruited Carson Levit, a respected money manager who grew up in Silicon Valley and didn’t mind paying sky-high prices for tech stocks. Mr. Soros, however, put Mr. Levit through a grueling eight-hour interview, disagreeing with him time and time again. By the end of the session, Mr. Soros said: “Stan obviously wants to bring you in, but I’m still nervous,” Mr. Levit recalls. “He looked at me like I was sort of a nut.” Still, Mr. Levit was hired to help manage the biggest part of the Soros stock portfolio, soon to be dominated by tech stocks.

And Mr. Druckenmiller warmed to them. Attending Allen & Co.’s annual summit conference of corporate chieftains in Sun Valley, Idaho, last July, he heard a lot of talk about how technology was changing the whole economy. Soon the Soros funds were buying these stocks and selling short some Old Economy stocks. It worked: The Quantum Fund came all the way back to finish 1999 up 35%.

But this meant holding stocks with exorbitant valuations. At one point in February, while watching biotech firm Celera Genomics Group skyrocket, Mr. Druckenmiller turned to a trader and said, “This is insane. I’ve never owned a stock that goes from $40 to $250 in a few months.”

Though he did a bit of selling at the beginning of 2000, he held on to most of those inflated tech stocks, betting that “the Nasdaq rally was in the eighth inning, not the ninth inning.” Few underlings challenged him. “Stan admitted to me that he didn’t quite understand the entire story and was uncomfortable with valuations,” says Richard Eakle, an outside money manager who took part in Soros internal conferences this year. “But everyone was intimidated by Stan. It was a group of yes-men at the meetings.”

So when the hurricane hit in mid-March, the Soros funds were leaning the wrong way: holding lots of tech stocks and shorting the Standard & Poor’s 500 and Old Economy names such as Goodyear and Sears. The market got so volatile it was hard for traders even to figure out their exposure.

Mr. Soros weighed in. “George accelerated the amount of time he was talking to us,” says Mr. Levit. “He was always cordial, but he had a different view and he wasn’t too happy.”

The Soros-Druckenmiller dissension came to a head over VeriSign, an Internet-security company that the funds bought at $50 a share last year and rode to $258 by late February. At Mr. Druckenmiller’s behest, the funds doubled their bet on VeriSign to $600 million in early March, after a visit by VeriSign Chief Executive Stratton Sclavos. The CEO wowed Soros executives with talk of what a pending acquisition of Network Solutions could do, say people familiar with the visit.

VeriSign was at $240 when Mr. Druckenmiller doubled up. As the Nasdaq quaked, the stock fell to $135 by early April. Mr. Soros told his deputy, “VeriSign is going to kill us. We should take our exposure down.”

“No,” Mr. Druckenmiller replied. “This is different than other Internet plays.”

It wasn’t. VeriSign’s shares fell to $96 in April, before coming back to $125 now.

The mood in Soros offices turned bleak. To relieve the tension, traders began to throw Koosh balls around, and Mr. Druckenmiller headed for the gym. But much of the day, he sat slumped in his office, silently watching the market. He had long talked about getting out of the business, but the 47-year-old executive, said to be worth about $1 billion, couldn’t bring himself to do anything.

On vacation with his family at his Palm Beach, Fla., home at the end of March, he couldn’t stop thinking about his troubles. He turned to his wife, Fiona (niece of Morgan Stanley strategist Barton Biggs), and said: “Money is supposed to be enjoyed, but if I can’t enjoy two weeks with my kids, what’s the point of it all?” a witness recalls. He promised her that he would soon quit, saying that he felt jealous of his friend Mr. Robertson.

The discord with Mr. Soros was major part of it. Mr. Soros “rode Stanley, and it came to a head,” says a friend of Mr. Druckenmiller. “A guy of Stanley’s stature and personal wealth didn’t need it.”

On April 18, with the Quantum fund down 20% for the year, Mr. Levit greeted an agitated-looking Mr. Druckenmiller with a “how are you” at 7 a.m. “What do you mean, ‘How am I?’ We just blew up,” Mr. Levit recalls Mr. Druckenmiller saying. “I can’t believe we’re in this mess again.”

That day, Mr. Druckenmiller handed in his resignation, and Soros Fund Management began the process of selling off most of its holdings. Quantum is being renamed Quantum Endowment Fund, with a new strategy of safer investing to help Mr. Soros fund his charitable activities. Some outside investors are pulling out money, and the fund is down to $7.1 billion now. The founder will keep his money in various conservative Soros funds.

As for Mr. Druckenmiller, “It would have been nice to go out on top, like Michael Jordan,” he said at the news conference 10 days later. “But I overplayed my hand.”

 

 

http://money.cnn.com/2000/04/28/mutualfunds/soros/

Long/Short Funds Tend to be more ‘Marketing of Beta’, not ‘Alpha’ Businesses – Jim Chanos

Straight from the Horse’s mouth (i.e. Jim Chanos):

I view macro and short selling as skill-based or alpha businesses, whereas equity long/short hedge funds tend to be more of a “marketing of beta” business. I am always amazed that investors will  pay 2 and 20 for a manager that is always net long.

I have been saying that for 20 years. It is interesting because I run an alpha-based business and I  am more sensitive to it than others. I sit on investment committees and I see it as an investor  who advises these funds. When I ask why a lot of hedge fund compensation is simply embedded market risk, I get very uncomfortable, squirming, dodgy answers. Or no answers at all.

Look at 2013. It is crazy to see managers who were up 15 percent command huge checks, when  the S&P was up 30 percent. Particularly since they were not balanced completely. They were 90 percent long and 30  percent short, or something like that. Not much alpha has been created by hedge funds, and
what was created has been taken by fees. This has been the case for a long time. In a way, short  sellers might still be one of your great bargains out there, at 1 and 20 percent of the alpha. That  is the closest I will get to a marketing pitch.

source: Steve Drobny, The New House of Money

A good friend of mine agrees. In his own words, “people confuse brains with a bull market.”

 

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