“…Debt-fueled stock buyback programs, central bank purchases, algorithmic and risk-parity buyers, and massive flows into passive, beta investments are fueling a wave of risk-insensitive activity unlike anything in history aside from 1929 and 2000. We believe this latest post-election move can be viewed as market euphoria, just as seeds of the next downturn are beginning to surface.
We currently believe we have a very favorable portfolio setup, similar to prior periods such as mid-2015 and early 2016, where there’s a very large gap between our long and short portfolios. Cheaper securities with favorable fundamentals (current longs) are lagging overvalued, cap-weighted indices (current shorts). Specifically, the securities in our long portfolio seem to have struggled to gain the favor of passive buyers, and are underappreciated. We believe our current portfolio setup will be rewarded with significant performance opportunities once the latest cycle of abnormal market conditions exhausts itself. Again, this environment appears to be quite similar to past episodes and may be setting up for an extensive long/short opportunity.” [read all]