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Horseman Capital co-founder throws in the towel

Date: Monday, November 23, 2009
Author: Suchita Nayar, Financial Times

John Horseman has lost his faith in markets. “The market asks questions of us. You can either believe or leave,” said the co-founder of London hedge fund group Horseman Capital, announcing his decision to step down from running his once-popular long/short equity fund.

While markets around the globe took off in March, the 51-year-old executive remained focused on economic obstacles large enough to derail the recovery train. As a result, he stayed short in his flagship $3.5bn (£2.1bn, €2.3bn) Horseman Global Fund, which is known for making directional bets. Buffeted by logic-defying gains in markets, his fund lost 23 per cent during the January-October stretch.

Mr Horseman is not a lone bear. This year’s market action has befuddled many a storied manager, who have awaited a fall only to see the government-spend fuelled markets keep rising. The conundrum they now face is whether the recent rise in equities is the genesis of a multi-year phenomenon or a mere bounce off the depressed lows of the first quarter of 2009 amid what is likely to be a period of sluggish worldwide economic growth.

“The financial crisis has thrown up real challenges, which in my view will colour the investment landscape at least out to the mid-part of the next decade,” Mr Horseman said in his resignation letter, adding market rallies would struggle to gain momentum and were likely to be very volatile. The expansion of emerging markets remained mostly questionable, he said, and fully priced for now.

He argued that stocks had rallied not for growth reasons but on the back of aggressive corporate cost cutting, and he questions how much more of that there is to go around and for how long. The corporate earnings outlook remains uncertain because consumers have cut spending, and companies cannot easily pass on higher production costs stemming from the relatively higher prices of oil and other raw materials.

He expects the investment environment to remain difficult for the coming years and and is not convinced he can deliver the directional fund’s target 10-12 per cent returns without altering risk.

However, he acknowledges he could be completely wrong. “Hence, it’s appropriate I stand aside.”

A fair amount of money is chasing momentum, he notes. “Some managers have the skill to get off at the highs. For others, it’s like playing with hot coals.”

Mr Horseman has posted annualised gains of 16.1 per cent since the fund’s inception in 2001, and 2009 is his first down year. Last year, his fund was up 31.3 per cent when the benchmark hedge fund index tumbled nearly 20 per cent.

Some investors will doubtless take his resignation as an exit signal and bolt from the fund by year-end, when he relinquishes the reins to Russell Clark and John-Paul Burke, who run the $240m Horseman Emerging Market Opportunities Fund. This three-year-old vehicle will be shuttered by the end of the year and its investors are being enticed to move to the Global Fund along with its managers.

The emerging market fund has fallen 24.5 per cent this year. In 2008, it gained 14.5 per cent.

Horseman Capital, which as of last month managed $4.5bn, has shortened the global fund’s notice period to 30 days from 90 days and is also waiving redemption fees, paving the way for a speedy exit for investors who want out. Mr Horseman expects to easily meet all incoming redemption requests. “If assets are downsized, so be it. We can adapt to a smaller size. A smaller pot may even work better as the markets are thinner.”

Mr Horseman set up his eponymous firm with two partners in July 2000 after leaving GAM. For now, he plans to keep managing the partners’ capital within the company. He will retain a controlling share in the firm and remain on the board of Horseman Global.