Wednesday, July 22, 2009

Vikings Float Off Course On Short Covering Gale

Ole Andreas Halvorsen is one of the best hedge fund managers bar none. And yet his Viking Global Equities massively underperformed the S&P in Q2: VGE generated a barely profitable 0.5% in Q2, a 15.4% underperformance of the S&P over the same time period. The problem - sticking with a rational and sensible fundamentally-driven strategy:

"The market rebounded strongly in the second quarter, and our short positions contributed a significant loss as they appreciated more than the broad market indices. At the same time, our longs performed in line with the indices. Due to our positive net exposure, Viking’s net return was virtually flat in spite of the negative long-short spread."

Then again, in this Fed sponsored bizarro world, only permabullish, pro-cyclical managers who are giddy to be back in the halcyon credit bubble days of 2006 like Larry Robbins are killing it. And as everyone knows, why do fundamental analysis, when the only reports relevant to each and every company for the next few years are the Z.1 and the H.4.1

Yet even Viking, which is known for being traditionally skeptical is starting to buy into the rally.

Our gross exposure increased from 86% to 112% in the quarter while our net exposure increased from 29% to 37%. We made a conscious decision to increase gross exposure as the uncertainty around government and regulatory actions has abated and we feel the market is more stable. We anticipate a further rise in gross exposure, but have not set a target level. Gross exposure increased through a combination of market movements and new idea generation. The rapid appreciation in share prices around the world inflated the values of both our longs and shorts, growing our balance sheet without producing material profits. We continually push our analysts to come forward with great ideas, and I am encouraged by the productivity of the investment staff and the number of new ideas we have added to the portfolio as changing stock prices provided opportunities for repositioning. At the end of the quarter, we had 145 equity positions, up from 125 positions at the beginning of the quarter.

Also for HF clones, here is what you should do if you want to replicate the Norwegian's portfolio:

At the end of the second quarter, Invesco Limited was our largest long position at 4.2% of capital. Our ten largest longs comprised 32.2% of capital and the ten largest shorts accounted for 12.2% of capital. The largest individual short position represented 2.3% of capital. The following is a list of our ten largest long positions on June 30th (in order of size):

Invesco Limited (IVZ.N)
Mastercard Inc. (MA.N)
Visa Inc. (V.N)
Unilever NV (UNc.AS)
The DIRECTV Group, Inc. (DTV.O)
Google Inc. (GOOG.O)
JP Morgan Chase & Co. (JPM.N)
The Walt Disney Co. (DIS.N)
Bank of America Corp. (BAC.N)
Qualcomm Inc. (QCOM.O)

On the flip side, the focus of negativity falls in the banking, capital goods and other financials spaces.

And while most other hedge funds claim to be enjoying massive inflows of capital, the same is apparently not the case for the Norwegian Greenwicharian:

Gross external redemptions for the second quarter were 4.9% of capital under management. We continued our longstanding business practice of running the fund cash flow neutral by seeking to replace redemptions with offsetting subscriptions during the period. On only four occasions in the past ten years, when the combination of idea generation and liquidity were aligned, did we grow our capital base through incremental subscriptions.

Bottom line, the Vikings' underperformance is temporary.... or rather, it can only persist as long as the artificial constructs that drive the market higher day in and day out are in place. One can hope that truly efficient, fundamentally driven capital markets can return one day. Look for Viking to be a coincident indicator when Ben Bernanke allows that particular event to occur.

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