After four strange days this week we have made some mistakes (including owning a lot of Bank of America), cleverly covered some shorts and bought some longs on Monday (but limited our trading because of blind fear), made a few more mistakes, had some luck (I mean really good luck) and guess what: we are flat.
We are down low single digit for the month - but hey - I reckon there are a lot of people who would swap.
We were never "threatened" meaning there was little risk of what Warren Buffett refers to as "permanent loss of capital" but it was an altogether uncomfortable experience.
But I am going to tell you something that most hedge fund managers won't admit: the difference between flat and minus seven percent on a week like this one is three parts luck and one part good judgement.
The really big negative surprise
The really big negative surprise from the week was the extent to which we were vulnerable to general hedge-fund liquidation. Our shorts - usually higher beta than our longs - and a source of most of our profits this year - just did not give us the hedge. Hedge funds were liquidating - either to meet margin calls or just to meet large anticipated redemptions. They were selling the most liquid stocks and some were buying back higher short interest stocks (hence those being conspicuously stronger than market).
In most markets our portfolio has relatively low beta (I think about 20-30 percent) meaning if the market drops 50bps we expect to be down 10-15bps and anything different is "alpha". This week we tracked market to a much larger extent and on one day (Wednesday) we actually fell slightly more than market in the first hour. I was genuinely and unpleasantly surprised.
We had two bits of luck during the week. Firstly our put-option position on Trina Solar paid off big time even though the thesis was mostly wrong. We covered half the position. That was worth a few points. We have a changed thesis which we are very comfortable with and have positioned differently for the changed thesis.
Second we have a large (and sometimes discussed) position in News Corp. Good results sent the A class share up 18 percent. The results were driven (yet again) by Cable TV Stations. Fox News may or may not be fair and balanced. Whatever: it is extraordinarily profitable.
Logitech: another thing we got wrong
I pretty-publicly lost a fair bit of money on Bank of America. It was for a while our biggest position and whilst we trimmed some we have not played it well.
But I am just as upset about Logitech. I wrote up our basis for shorting it. I got roundly panned as an idiot on Business Insider (see the comments). I sat with the position for a while - but the results were slightly different to how I anticipated and I thought I might be wrong and covered.
Here is the six month stock chart:
Being wrong and losing money: that is part of the game.
Being right and not making money: that is really annoying.
Now I can't even remember the reason why we covered Logitech. It seems so silly... and maybe had I had the flu that day or a sprained ankle we would not have covered it. And the fund would be slightly more profitable.
Day to day there is a lot of luck in this game. But if you avoid being stupid (owning Logitech for instance as it zoomed towards obsolescence) you will do OK over the long run.
Just make sure that there is nothing in the short run that can truly hurt you.
And be smart - really smart - but try not to be "too smart". That is a hard judgement.
Remember the difference between flat and minus seven this week is dumb luck.
And this week we were lucky and we were not too smart. Which - from the perspective of our clients - is a good thing.
The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.