Home Hedge Funds Dash for trash hits Caledonia in the shorts

Dash for trash hits Caledonia in the shorts


As markets rallied hard, the short book dropped 20.7 per cent in the fourth quarter and 14.3 per cent in December alone, co-chief investment officers Will Vicars and Mike Messara told clients this week. It has made some of that back this month.

Still, it is a timely reminder that shorting is risky, particularly so when markets run hard.

Long/short managers across the street, not just at Caledonia, reckon stock price movements are now exacerbated by the rise of hedge fund “pods”, who trade hard and fast and are dictating market moves like never before.

These global funds turn over huge amounts, get in and out of stocks quickly, and are quick to cut as catalysts do or do not play out. The trading, backed up by hard stop-loss risk strategies, amplifies the ups and downs, and makes shorting even more fraught.

“Most investors today have brief time horizons,” Caledonia’s duo told clients. “The rise of multi-strategy hedge funds has compounded this problem. Typically, portfolio managers at these firms take positions in companies for days or weeks based on myriad trading strategies.”

Seeing the rally, Caledonia – which started short selling in 2012 – could have closed its short positions, but that is not its way; the firm typically holds its longs for seven to 10 years, and shorts for two years.

It has no stop-loss-type risk tools on the up or down sides, and is more focused on fundamentals and earnings than share price drawdowns.

Its mandate is long-term compounding growth stories or structural losers, not quick flips, which is how it made its name in the first place.

For Caledonia, the end result in 2023 was a 6.4 per cent annual gain for the Caledonia Global Fund, which houses the long/short book. The longs were good, while the shorts got hit by the market rally.

Its combined strategy, which includes a side-car of core long positions such as Zillow, gained 37.5 per cent. (Remember, the index was up 23.7 per cent.)

On a three-year basis, the global fund is down 17.6 per cent and the combined strategy has dropped 20.4 per cent. The MSCI World is up 9.2 per cent. The combined strategy had $8.3 billion in assets under management as of December 31.

Vicars, Messara and their team are digging hard to rebound from a tough few years. Their clients, who include a bunch of US endowment funds and some of Australia’s wealthiest families, are feeling it. No one likes losing money.

Some feel trapped by the recent losses, but they know Caledonia can pull a rabbit out of the hat better than just about anyone, and are now so wedded to Zillow and other core “long” stories that it is hard to cut and run.

Vicars and Messara were upbeat in their note. “We think it is one of the best times ever to be an investor in Caledonia,” they said, adding that their core longs were poised to deliver “excellent results” after a volatile few years.

To help keep the faith and to keep investors focused on earnings rather than share prices, Caledonia also posts to clients its in-house earnings forecasts on core long positions.

And based on those forecasts, it is telling investors its core longs will be up 32 per cent to 157 per cent each this year and next! If that happens, Caledonia will be one of the great comeback stories. “We fully expect to be occupying new heights at this time next year,” they said.

If not, then some of Caledonia’s stories about Zillow and the other core longs will be looking stale, and some tough decisions will have to be made.

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