Crispin Odey, one of the most well-known permabears in the hedge-fund industry, has been vindicated this week as stocks cemented their worst run since the financial crisis.
As the Financial Times reports, Odey, who has bet against everything from Tesla to the British pound in recent years, posted a 5% gain in his European fund this week thanks to the short-seller's bets against Tesla and shale stocks.
Though few funds have advertised their performance amid the market carnage - as Bloomberg reported earlier this week, many funds upped their leverage as stocks soared to record highs before the big market rout.
Hedge funds, which use borrowed money to amplify returns, went risk-on in a major way this month. Net leverage, a measure of industry risk appetite that takes into account long versus short positions, rose by about 5 percentage points, one of the fastest expansions in years, according to data compiled by Morgan Stanley’s prime brokerage unit.
To be sure, Odey needs the party to continue to push his fund back into the green for 2020 (he's still down 5% for the year). But if investors don't get the Sunday-evening 'coordinated central bank action' that CNBC has seemingly brainwashed the market into expecting (many believe it triggered Friday's intraday relief rally). However, if Jim Bullard's comments from earlier today are truly representative of how the doves on the FOMC are feeling, the three rate cuts priced into the Fed funds futures market might seem overly optimistic.
When his peers started to seem overly long, Odey's fund was one of a handful of traders taking the other side.
Per the FT:
"We went into coronavirus with the market incredibly bullish, everyone was long," Mr Odey said in an interview. "I’m more cautious than most people."
Odey believes markets are headed for more pain, as the coronavirus outbreak, and the ensuing supply- and demand-side shocks, make it impossible for companies to deliver on the market's elevated earnings-growth expectations.
He said that last year’s rally in markets - the S&P 500 delivered a return of 29% - was driven by the expansion of price/earnings multiples rather than earnings, which meant that investors were paying more for the same streams of profits.
"What you really needed for this year  was for earnings to come through," he said. "Earnings are just not coming through - it’s going to be the opposite. The question is, does another dose of monetary madness offset the willingness of the market to really look at what’s really going on?"
Odey's fund lost 10.1% last year after gaining a staggering 53% in 2018. The year got off to a pretty brutal start as Odey's bet against Tesla drove his fund deep into the red. But with markets in turmoil, perhaps more investors will start to take notice of themes like the threat of 'Falling Angels' triggering a blowup in the corporate credit market.
Most of this money hasn't gone into capital spending and expansion to boost profits and revenue, Odey claims. Instead, companies have lavished borrowed money on stock buybacks.
"We [the economy] have long ago stopped allocating capital efficiently," he said. "A long time after savings have gone, credit will still be there, and it’s horrible."
With so many weak spots, one can't help but wonder whether this might really be the start of the "profound 25-year bear market" that Odey once predicted.