Impala Asset Management, the $2.2bn hedge fund run by George Soros’s former chief investment officer, is benefiting from bets that an overhaul of America’s infrastructure and sustained demand from China will buoy appetite for commodities.
Robert Bishop, who founded Impala in 2004, said they decided infrastructure would be a win whoever won the US election, but doubly so in the case of Donald Trump, a real estate developer.
“Donald Trump builds things,” Mr Bishop said. “That’s what he’s done for a living.”
The Connecticut-based Impala fund, which bets on stocks based on macro themes, has been one of the best performing hedge funds of 2016, returning 18.6 per cent as of the end of October in its main fund. Its long-only fund was up more than 30 per cent. By contrast, Hedge Fund Research’s equity hedge index is up 3.71 per cent this year.
Mr Trump’s victory, alongside Republicans keeping control of Congress, has helped send US stocks to records while battering the bond market. Investors have so far focused on the president-elect’s plans to stimulate the US economy rather than his threats to rip up trade deals and impose tariffs.
The fund’s performance has also been driven by bets on mining companies buoyed by a rise in metal and other commodity prices this year, on the back of robust demand from China. Commodities, infrastructure and China represent about 40 per cent of the fund’s equities exposure.
Mr Bishop, who also has experience as a principal at Maverick Capital and a managing director of Tiger Management, said China hit a hard landing in the fourth quarter of last year but has since recovered, with strong spending on power grids and property to boost demand.
“The world kind of accepts that China has got better this year, other emerging markets have been getting better — all of that bodes very well for commodity prices,” he said. “There’s also very little new capacity coming on in commodities.”
This optimism is a sharp contrast to those who fear that China’s growing corporate debt pile, some of which sits on the balance sheets of unprofitable state-owned enterprises, will prove a big drag on the economy.
China has cut more capacity than expected in previously unprofitable sectors such as steel this year, while there is still growth for demand in lower tier cities in the country, Mr Bishop said. Historically, multiple-year drops in steel demand have been followed by rebounds, he said.
Capital spending in the metals and mining sector compared with depreciation will hit its lowest level in 62 years by the first quarter of next year, he said. Copper could rise close to $4 by the end of 2018 from $2.5 now, he said, while iron ore could hit $95 a tonne and oil trade in a $75 range.
“We’re seeing real demand for commodities starting to improve; it’s not only speculation,” Jacques Bouthillier, a senior analyst at Impala, said. Cement prices had increased despite the fact it did not trade on an exchange, he added.
That is a sentiment that has been reflected by analysts, with Goldman Sachs saying this week it recommended investors go long commodities.
The country is also finding new markets for construction through President Xi Jinping’s One Belt, One Road policy, he added.
While China’s property market in the Tier 1 and Tier 2 cities is likely to continue to slow, there is still room for growth in lower tier cities as they build out their urban transport, Mr Bouthillier said.
At the end of the third quarter, Impala’s largest holding was in Teck Resources, which made up about 15 per cent of its portfolio. It has been a “very good stock for us this year”, Mr Bishop said.
It also held NVR, a homebuilding and mortgage company in the US, Rio Tinto, Swift Transportation, Fluor Corp, Harley-Davidson and Newmont Mining Corp, according to public filings.
Mr Bishop is speaking in London at the Sohn Conference in December alongside TCI’s Chris Hohn and Masroor Siddiqui from Naya Fund, where hedge fund managers present a pick of a stock to bet on or against in the coming year.
