market folly

John Burbank's hedge fund firm Passport Capital is "net short both in dollar and beta terms" according to their first quarter letter to investors.  But even with this positioning, they obviously still have some sizable longs so we've also posted up Passport's top 10 holdings. 

Their Passport Global Fund started the quarter with net exposure of -3% and ended the quarter net short -12%.  On the subject of taking on more risk, Burbank writes (emphasis ours):

"For several years now, we have said that we would raise our risk budget when we felt it was prudent.  In  large part this would generally require three things to occur:  1) a lower correlation regime that could  benefit idiosyncratic stock selection; 2) the potential for a less-skewed distribution between stock winners 5  and losers; and 3) conviction in our macro and bottom-up view.  Since the March 2009 equity low, the  S&P has rallied 122%.  The Russell 2000 has rallied  over 152% in that time.  Given our forwardlooking economic assessment, this is the first time in a long while where we believe the best opportunity  to derive idiosyncratic alpha is in security selection on the short side."

This stance largely comes from their belief that central bank liquidity has fueled upside and that the easy money has been made.  We highlighted Passport's short positioning in Burbank's last letter.


He goes on to reiterate his conviction:

"To be clear, we think this is one of the most attractive environments for stock selection we've witnessed in at least five years and that now is a prudent time to run at a higher level of predicted active risk.  We aggressively increased our risk budget in mid-February ... If correlations stay persistently low, managers with stock selection skill should benefit."

We've also previously posted Lee Ainslie and Maverick Capital's letter with insightful commentary on the market's extreme correlation in recent years.  Now that dispersion has increased, numerous long/short managers are undoubtedly rejoicing.


Burbank concludes that central banks and 'performance anxiety' are the two main culprits for the hot start in equities this year:

"Through the first quarter, central bank liquidity provisioning has, we think, largely served to fix prices higher and has driven investors to become fully net long invested in order to avoid missing out.  Looking ahead, we believe we're going to see a great separation of winners and losers, of solvency and insolvency, of liquidity and illiquidity around the world."

However, it does appear as though Passport's conviction has spooked some investors as their main fund saw outflows of $509 million in the first quarter (it now manages $1.3 billion).  The firm in general now manages $3.2 billion.

Be sure to also check out more from the hedge fund's Q1 letter: Passport's top 10 holdings & Saudi equity theses.