So says Douglas Kass, in an
interview with Barron’s. Kass is the founder and president of Seabreeze Partners Management, a hedge fund that oversees about $200m in short positions.
As of April 30, Kass’s flagship Seabreeze Partners Short fund was up 16.5 per cent, excluding fees, versus a 5.6 per cent loss for the S&P 500, notes Barron’s. Since inception in January 2005, the fund is up 40.7 per cent, compared with a 15 per cent gain for the S&P.
Also notable:
Short sellers are an endangered species, like the dodo bird. The dedicated short pool totals about $5.4bn, according to Knowledge@Wharton. That’s roughly one-seventh the size of the Fidelity Magellan Fund. It’s also a tiny sliver of the approximately $1,9 00bn of hedge-fund assets. But it provides a huge business opportunity for Seabreeze.
My friend Jim Cramer’s mantra is that there is always a bull market somewhere. At Seabreeze we consider ourselves the anti-Cramers; we say there is always a bear market somewhere, and it’s our job to find it. Short selling is the least served and most uncrowded hedge-fund strategy out there.
We strenuously avoid stocks whose short interest is high relative to the float, or companies whose shares have large short positions relative to their average daily trading volumes. Many short sellers have made the mistake of shorting valuation and have blown up during short squeezes. Avoiding them allows us to sleep at night and allows time for our negative fundamental catalysts to develop.
We also mitigate risk by avoiding leverage. Historically, short sellers have taken concentrated positions, often in companies with small to medium capitalizations, and then used — and abused — leverage. That’s a recipe for disaster, particularly when they select investments with too many shorts.
[130/30] funds are a silly gimmick and their half-life will be short. Nearly every long/short manager thinks he is equally facile on the short side as the long. Shorting requires a different skill set; you have to have the mindset of an investigative reporter and be a skeptic at the core. Also, many 130-30 funds use exchange-traded funds as a proxy to short. That’s a cop-out and a poor way to produce excess returns.
The consumer is spent up, not pent up, and more levered than during any period in history. That’s one of the structural problems facing the economy. At the same time, job growth is declining and real disposable incomes are pressured as inflation literally is eating away at the consumer’s buying power. It is frightening that the consumer has entered this economic downturn with the most levered position in history.
More than anything, I’m short Berkshire because of Buffett’s recent investment-style drift. In the past five years, Buffett frequently called derivatives “financial weapons of mass destruction.” Yet, very much out of character, he immersed himself in several large and thus far unprofitable derivative transactions, leading to an unrealized $1.6 billion pretax loss in the first quarter. I’m also short Berkshire because the salad days for insurance, which is the cornerstone of Berkshire’s business, are over.
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