Chris Brown’s Aristides Capital gained almost 10 percent last year, underperforming the overall market as many of its short bets took a beating, according to an investor letter. But Aristides, a long-short fund that also has a quant strategy, thinks that the market euphoria that caused the stock market to surge late last year may be ending.
With interest rates still at elevated levels, “if a large enough quantum of asset owners decide that they want to take their casino winnings and stuff them in Treasury securities (bills, notes, and bonds), the market could trade sideways to lower for the rest of the year,” Aristides’ quantitative research analyst Sam Bubnovich wrote in the yearend letter to investors.
He noted that retail investors’ interest in low quality and highly shorted names “is back to 2021‐era highs (though nowhere near the frenzied peak of GameStop/AMC meme stock excitement), and crypto trading volumes have surged back.”
Chris Brown, who founded the hedge fund, typically writes its letters to investors.
The Aristides analyst does acknowledge that despite markets being at all-time highs, “100 percent of the long‐term return of investing in stocks occurs when they are above previous all‐time highs, and there are few technical indicators more strongly indicative of forward returns than multi‐year breakouts.”
Other positives that he noted include lowered inflation and the Federal Reserve’s indication it is unlikely to raise rates this year. Also, the dollar is weakening — which could help corporate profits, as will the consumer. “U.S. consumption and investment remain strong, and most economists who predicted recession in 2023 have changed their tune,” he added. “On paper, there isn’t really any reason why indices couldn’t break out and then run further this year, as well.
But the downsides include the fact that “concentration in huge winners creates major crowding risks,” Bubnovich said. “One bad earnings report for Nvidia or Google could prompt a scramble for the exits, and analyst estimates for earnings growth and margin expansion remain, not to put too fine a point on it, world‐historically optimistic.”
Higher rates may hurt risky names. Bubnovich said that “the crucial difference between now and then” is the rise in interest rates. “The ten‐year rate has gone from 1.5 percent to 4 percent, and high‐yield spreads from 2 percent to 4 percent.”
As a result, companies seeking high-yield financing might have to pay 8 percent “or more” compared with about 3 percent in 2021, according to the analyst.
“Most concerningly, the primary mantra of 2009‐2022 was ‘there is no alternative’: investors who had return targets to hit simply had to be nearly fully invested in stocks (or private equity, or venture capital) to hit even a 5 percent return target. Now, they do not,” Bubnovich said.
One of last year’s biggest losers for Aristides was a short on crypto firm Coinbase Global.
But the biggest gainer was also a crypto player. Aristides had a long position in the Grayscale Bitcoin Trust, whose shares had been trading at a 39 percent average discount because investors did not have a way to redeem their shares. By the end of 2023, after winning a legal battle with the Securities and Exchange Commission, Grayscale converted the trust into an exchange‐traded fund, enabling it to allow for redemptions.
“By the close of the year, the discount was in the high single digits, and we expect it to fully close sometime in early 2024, realizing the remainder of the profit and exiting the trade,” the Aristides analyst said.
The hedge fund’s other winners included some of the most popular hedge fund winners of 2023, including Alphabet, Microsoft, and Meta.