I got an update from Ivan Losov - manager of the world’s worst performing hedge fund.
I have been following Ivan’s career closely, going to great pains to do the exact opposite of what he is doing in almost every way…
Here is a copy of his most recent letter. It discusses the nascent global manufacturing boom, the growth story in setting client funds on fire and his short positions…
Letter To Investors - Ivan Losov - Permanent Losov Capital - May 2018
You may have noticed that the value of your investment has fallen by roughly 50% this year (49.5% to be precise).
In this letter, I want to explore my successes over the past year and give investors an insight into the Permament Losov Capital recipe. I will also explore some of our macro themes going forward.
Before I go any further, I would like to address rumours which are circulating that I have fallen ill. Some investors have even suggested that I have passed away, however this is not the case. It seems the reports of my death are greatly exaggerated.
2017 was a tough year. We expect 2018 to be on the same level of toughness, possibly tougher - but not that tough. Lets take a look.
Theme One - Surge In Global Manufacturing
We were disappointed by the performance of our US manufacturing theme. US manufacturing has experienced a century long decline. According to our research, the industry was gradually declined 122 years year-on-year and it has been in recession since 1972.
For this reason, we believe the industry is positioned for a turnaround and we are going to capitalise on it. We are shorting almost every stock that isn’t US manufacturing and we are willing to suffer significant drawdowns until we are proven correct.
We accept drawdowns are a core element to our strategy and we are perfectly willing to accept the loss of your capital.
Theme Two - Incineration of Client Capital
Our second theme is a little obscure, however we believe the returns could be promising in the long-term.
During an investment conference this year, we heard a hedge fund manager speak about the rise of cryptocurrency. To quote him directly, he said:
“I will never invest in Bitcoin. I would much prefer to set my money on fire”.
I must admit that our firm has never considered the incineration of funds to be an appropriate use of client capital, neverthless we are always on the lookout for avenues of growth in this space. This may prove to be a growth opportunity in this space.
Theme Three - Short Positions On Shorts
We believe the most exciting investment theme is our global shorts theme. We live in an increasingly unpredictable world, however, there are a few things we can accept as truths:
The planet is getting warmer
Climate change is generating hotter days
People wear shorts on hot days.
Using a 500 year quantification of global heat-measured interfaces, we have estimated that this summer will be 2 degrees colder as a result of lots of things happening in the climate. We plan to capitalise on this opportunity and our idea is very simple. We are going to short shorts. Before we analyse our position, lets turn to our current shorts macro model.
What do we know about shorts? Shorts are a garment worn over the pelvic area, circling the waist and splitting to cover the upper part of the legs, sometimes extending down to the knees but not covering the entire length of the leg.
They do not cover the leg entirely and that is key to remember for this trade – they do not cover the leg entirely.
If global temperatures are on track to decrease by 2 degrees this year, we have every reason to believe that the purchase of shorts will be in decline this year. In this event, shorts companies will default on their loans triggering a shorts crisis. We list below the companies which we intend to bet against:
• Shorts International
• UR Shorts
• Shorts N’ UR Phat G-Strings
We believe there are opportunities in this space – we don’t intend to waist them.
Theme Four - Snapchat
Investors may remember an incident when the board placed a veto on my decision to invest almost 90% of the fund in snapchat.
I remember joking with the executive team that I would fire them as a result of this incident!
And I did.
Investors were concerned that I was investing in a business that was earning no money and I knew nothing about. Investors also pointed to snapchat’s continuous decline in value since their IPO, telling me that snapchat would almost certainly lose money in every quarter ahead until the business was physically shutdown.
This insight proved to be absolutely correct - our fund lost a third of its value in the last three days.
Our overall performance in Q1 was -30%. This was a 15% increase from Q1 the previous year (-45%). This means we have recorded 15% growth year-on-year. But we won’t be patting ourselves on the back just yet.
Our fund prides itself on long term performance, so I am happy to ride out the storm while the value of your investments decline.
As Mr Buffett said himself:
“Be greedy when others are thankful and thankful when others are greedy”.
Investors have raised their concerns about the lack of female representation at board level. The dominance of males may be explained by the fact that I am now the only person on the board and I do not plan on hiring anyone else. Still, these figures are not good enough – there is still work to be done.
Yours in growth,