Hindsight Capital’s bet on a long, calm voyage pays off
The FT's John Authers pay his annual visit to the offices of Hindsight Capital LLC. This is the hedge fund with the world’s only truly infallible investment strategy: hindsight.
It's time to pay our annual visit to the offices of Hindsight Capital LLC. It's the imaginary hedge fund that always beats all others because it is only allowed to make investments with the benefit of hindsight. So it only makes the investments which we know at the end of the year are going to work out.
So first of all, its big decision is to brace itself here in the US. Now that's unusual, because hindsight always likes to base itself in the country which has the weakest currency for the year. If you have a weak currency, it makes everything that you invest look better.
This year you had a big spike in the dollar around the election of Donald Trump at the end of 2016. And hindsight could see that both Europe and China were going to do better than many people had feared, and that that was going to lead to a weak year for the dollar. That's what happened. As a result, the S&P 500 in round numbers, if you quote it in dollars, is up some 20%. If you were to quote it in euros, if you're a euro-denominated investor, it's only up about 6%. Moving to New York makes a big difference.
Next, and you've probably heard about this one already. It bought Bitcoin. Even at the beginning of the year, Hindsight Capital could see that the cryptocurrency was going to have another phenomenal time of it, because interest was going to spread through Asia, South Korea, Taiwan and China really took to Bitcoin this year. While the excitement ratcheted up here in the US, as it began to take on the trappings of a true mania.
$100 in Bitcoin at the beginning of the year was now worth about $2,000. But Hindsight Capital didn't just stop there. It could see that there was more to the Bitcoin craze than just Bitcoin itself. There's also great excitement about the blockchain technology under it and the many new ways people are trying to find to use that, such as smart contracts.
Now the most prominent name trying to offer smart contracts at the beginning of year was an outfit called Ethereum, which has its own currency. $100 in Ethereum at the beginning of the year is now worth $9,000.
Next, it decided to short volatility. There are plenty of exchange-traded notes out on the market which gain as the market becomes calmer, as volatility drops. Now at the beginning of the year, we've had low volatility for a long time. We knew that we were going to have Donald Trump with all the uncertainty he would produce. Also there were some very scary-looking elections and populists poised for what could have been victory in Europe. It seems to be a virtual certainty that volatility was going to rise.
Plainly Hindsight Capital thought that was a great opportunity to buy. In fact, things have broken the way that people in the market wanted them to. And this has been the calmest lowest volatility year in markets in over half a century. Betting against volatility at the beginning of the year made a return for Hindsight Capital of almost 200%.
Next it bought the BATs with FANGs. The BATs are the big dominant Chinese internet companies-- Baidu, Alibaba, and Tencent. Those three companies equal weighted are up about 80% for the year. They appear to be very well entrenched in China.
Meanwhile the FANGs in America are the big dominant internet companies here. It originally stood for Facebook, Amazon, Netflix, and Google. Google now typically people will add Apple and Microsoft to that list. There is an index of FANGs. There are ETFs and futures on FANGs. And they're up about 60% for the year. It's created great concern as the year has gone on that these companies are becoming too dominant for everyone's good. But for the time being, they really have been a licence to print money for Hindsight Capital.
Next it made a big historic bet on US industrials. For many years GE has been the biggest industrial company here in the States, and Boeing a maker of airliners, is the second biggest. But even though those two companies are very codependent in many ways-- GE makes the engines for Boeing's planes-- Hindsight Capital could see that Boeing was about to take off in a big way, thanks to the optimism surrounding the Trump Administration and defence spending, while a loss of investor confidence was brewing in GE. So it shorted GE's stock and used the money to buy Boeing stock. And that strategy amazingly turns $100 into $330 by the end of the year. Boeing is now bigger than GE.
Next, it went long internet retailers, obviously led by Amazon; and short department stores in the US. As Hindsight Capital could see at the year's beginning, this was the year when the long growth of internet retailing would finally lead to a crisis of confidence in conventional retailers. We've seen bankruptcies of many famous conventional bricks and mortar stores. We've seen lots of financial problems for malls. Long internet retailers, short department stores, would have made a profit of 71% by the end of the year. It had been much higher at one point.
Next Hindsight Capital made a big bet on the Chinese consumer. At the beginning of the year, people were very worried about China and particularly about whether it really could go through with its long-held ambition to move the Chinese economy away from an export-led economy that makes stuff and sells it to foreigners, into a consumption-led economy. Well, this year it looks as though it is working.
The MSCI China index, that's covering the biggest Chinese companies quoted in Hong Kong, was up 48%. And the A-shares index of consumer staples companies quoted in the Chinese mainland making stuff like food, alcohol, and so on; gained 85% for the year for Hindsight Capital who could see the Chinese consumer coming.
It's been a great year for Hindsight Capital, even though this wasn't a year when you needed a lot of hindsights to do well. Virtually any major stock index you care to mention around the world has done well. Bonds haven't lost money. It's been a very, very easy year to make money, although obviously a difficult year to make quite as much money as you could have made with Hindsight Capital.
The only sad problem is that Hindsight Capital still haven't told me their trades for 2018.