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The trades a clairvoyant would have made in 2016

Christmas is almost here (and so is Hanukkah), and so it is time for the Long View to revisit the offices of Hindsight Capital LLC once more. Hindsight Capital, for the uninitiated, is the hedge fund that beats all others year in and year out because it is endowed with 20/20 hindsight; it can see the future.

The returns to clairvoyance are potentially infinite, so it has a few restrictions: no individual securities, no leverage and no trading through the year, other than one fixed opportunity to change trades at midyear (which turned out to be very useful in 2016). It can, however, bet on assets to fall in price, by borrowing them and then selling them. These are the trades that won in 2016:

Move to Buenos Aires

Hindsight always locates in the country with the weakest currency, as this automatically makes returns look better. Despite a strong temptation to move to London, where it could see the Brexit vote coming, Hindsight chose Argentina, whose economy was obviously racked by inflation and doubt, even after the market-friendly new administration made a deliberate devaluation at the end of 2015.

The Argentine peso was the weakest currency in the world. Hindsight bought neighbouring Brazil’s real (the strongest) against the peso, and made 43.5 per cent.

Buy Brazil, sell China

Brazil entered the year in the grips of economic and political crisis. With riots on the streets and a president facing impeachment, Hindsight saw that it was time to buy. Brazil’s Bovespa rose more than 70 per cent in dollar terms. Meanwhile, China — a far healthier economy — still had to deal with the fallout from its burst equity bubble in 2015. Shorting the Shanghai Composite and putting the proceeds into Brazil’s Bovespa yielded 92.6 per cent in dollar terms.

Buy coal, sell clean energy

The Paris conference in December 2015 was an obvious watershed, coming after an aggressive campaign to divest from fossil fuels. Hindsight saw that the contrarian buying opportunity was there, shorted the S&P Global Clean Energy index, which fell, and bought the Stowe Global Coal index, which more than doubled. Resulting profit: 155.7 per cent.

Long US banks, short eurozone banks

The eurozone never took the needed action to clean up its banks’ balance sheets after the crisis. The US, with many fits and starts, did. With extreme low interest rates in Europe came extreme pain for eurozone banks while US banks surged with the Trump rally. Put the trades together and the profit was 34.6 per cent.

The Brexit trade

Naturally, Hindsight Capital’s managers saw the referendum coming. They sold pounds to buy bitcoins, a frothy cyber-currency that enjoyed another surge in 2016. By the end of the year, Hindsight made 118 per cent.

Hindsight also found the squabble over whether the Brexit vote had really been damaging to UK securities somewhat laughable, and put British clients into the FTSE All-World excluding the UK index (up 27.2 per cent in pounds), and not the FTSE 250 index of UK companies (up 2 per cent).

The relax trade

Hindsight saw the political shocks and also foresaw that the market would look straight through them. So it sold the Vix index, which tracks how much people pay in the options market to hedge against volatility. By year’s end it was at a 30-month low. Putting the proceeds into the S&P 500 helped generate a total return of 69 per cent.

The year of two halves trade

Hindsight Capital’s managers foresaw that the world would be gripped by a deflation and recession scare that would climax just after the shock of the Brexit vote. After that, with the talk increasingly of reflation through fiscal policy, and then the growth-friendly election of Donald Trump, it would be time to reverse the trade in favour of investments that benefited from growth and inflation.

Across the world and across the asset classes, Hindsight made huge money by reversing itself after June 30, which was at or very near the turning point. 

Stocks v bonds: Hindsight was long US long Treasuries and short the S&P 500 until midyear (making 10.8 per cent) and then went long stocks and short bonds, making 26.8 per cent. Total cumulative return: 40.6 per cent.

Cyclicals v defensives: Hindsight shorted economically cyclical stocks and went long defensives for six months (10.8 per cent), and then reversed (making 26.8 per cent). Total profit: 40.6 per cent

Precious v industrial metals: Buy precious metals when you are worried about growth, and switch to industrials when you think the economy can pick up. This trade made 17.1 per cent, then 31.2 per cent, for a total of 53.6 per cent.

Japanese stocks. The Topix collapsed into a bear market as investors braced for renewed deflation, and then recovered to end the year virtually where it started, as the yen fell, boosting stocks. Total profit from shorting and then going long: 54.4 per cent.

German Bunds: In arguably the most spectacular extreme of them all, German 10-year Bund yields dropped into negative territory by midyear. As the deflation scare receded, anyone (like Hindsight) now shorting the bonds did very well. Total return for those long and then short: 30.1 per cent. 

Hindsight Capital benefited from a clear and sweeping midyear turning point. A trend has been established. Will it persist in 2017, through all the political uncertainties? Unfortunately, as ever, Hindsight Capital never tells me its trades in advance.

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