Glencore Bears Regal, Watermark Stick to Short Bets Amid Rebound

  • Glencore top trade for Regal fund that rose 6.6% in September
  • Watermark has made 1.05% from Glencore shorts since June

The rebound in Glencore Plc shares hasn’t swayed hedge funds such as Regal Funds Management and Watermark Funds Management, who are sticking to bets that the stock will slump as falling commodity prices weigh on its finances.

A bearish wager on Glencore was the biggest winner for Regal’s $293 million Amazon Market-Neutral Fund in September, when it posted a 6.6 percent return, said Chief Investment Officer Philip King. A bet against the Swiss commodities trader and miner contributed about one-tenth of the Watermark Market-Neutral Fund’s 3.4 percent gross gain last month, said Chief Operating Officer Tim Bolger.

Glencore’s London-traded shares have jumped more than 70 percent from a record low set on Sept. 28, after the company announced asset sales and production curbs to assuage investors concerned about its debt burden, and as commodity prices rebounded. Yet some bears are sticking to their guns, with short interest in Glencore jumping since late September, according to Markit Ltd. data compiled by Bloomberg.

“After a 10-year bull market in commodities, there are a lot of excesses built into the system,” King said in a telephone interview Oct. 12. “Sadly, we need to see more mine closures and more pain in the sector before the industry turns around.”

BHP, Rio Shorts

The Regal fund has also kept bearish bets on BHP Billiton Ltd. and Rio Tinto Group, the world’s two largest mining companies, while exiting short positions on some other mining stocks that have fallen too far, King said. Shorting involves selling borrowed stocks, aiming to buy them back when their prices decline and pocketing the difference to make a profit.

The short positions in Glencore contributed 1.1 percentage points to the overall return of Watermark’s three funds since they were initiated in June, Bolger said Oct. 13. While Watermark has reduced the size of the bet for risk management purposes, Bolger said Glencore’s balance sheet is “relatively under more stress than other more diversified miners."

Glencore spokesman declined to comment. The company’s available committed liquidity is "materially above" the $10.5 billion it reported as of June 30, after a $2.5 billion share sale last month, it said in a document dated Oct. 6 on its website.

Commodity prices have surged from a 16-year low set in August on speculation that China will shore up its faltering economy and producers will rein in output. The recent rallies have presented opportunities to re-open short bets on some companies focused on bulk commodities such as coal and iron ore, Bolger said.

Sydney-based Regal and Watermark are among other hedge funds such as Lansdowne Partners and Passport Capital that have wagered that Glencore’s share price would decline. There are few reasons to get excited about the rebound in commodities, Henry McVey, KKR & Co.’s global head of macro and asset allocation, wrote in a note posted on its website this month. Jim Chanos, founder of Kynikos Associates, expressed concern this week that Glencore bought assets at the top of the market and is now selling at the bottom.

Glasenberg Plan

Glencore shares have plunged more than 50 percent in London this year on concern lower commodity prices and slowing growth in China, the largest buyer of raw materials, will make it difficult to repay debt. Chief Executive Officer Ivan Glasenberg announced a plan in September to reduce debt to about $20 billion, in part by selling assets.

The Regal fund has been betting against mining stocks for a few years, said King. It returned 19.4 percent in the first nine months, bolstered by short positions on the industry. Except for 2008, the fund made money every single year since its inception in 2005, according to a newsletter.

Since 2013, Watermark, which manages about A$130 million ($95 million) in two market-neutral funds, has been searching for high-cost companies focused on bulk commodities and with distressed balance sheets to short, Bolger added. Both funds make about 80 percent of their investments in Australia.

Other funds that made money from bets against mining and mining services companies include AMP Capital Asia Quant Fund. The $145 million pool returned 13 percent this year, including 0.49 percent in September, Lachlan Davis, head of multistrategy funds at the Australian asset manager, wrote in an e-mail on Oct. 13.

William Ma, Hong Kong-based chief investment officer at Gottex Penjing, which allocates capital to hedge funds, warned that bearish bets on mining have become a crowded trade.

“Together with the short Australian dollar exposure and the undemanding valuations in certain mining stocks, any small positive news would trigger a short squeeze just like the Glencore position,” he said. “From a risk-reward perspective, this trade might not be as attractive as a few years back."

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