The New Year is almost here, and it’s time once again to visit the offices of Hindsight Capital LLC. Regular readers will know that I have been interviewing the managers of this remarkable fund at the end of each year for over a decade. They use the one strategy that always beats all others, in all situations: hindsight. In other words, they can place trades at the beginning of the year in full knowledge of how things will result. The returns to such omniscience are potentially limitless, so they have to follow a few rules. No leverage is allowed, and no betting on individual shares, bonds, or very small and illiquid markets (so, to Hindsight’s great annoyance, they were barred from investing in GameStop or in the year’s top performing stock market, which was Mongolia). The fund cannot trade during the year, and must explain how a sensible person could have seen the returns on a trade coming on Jan. 1. Spotting the returns coming as the result of an earthquake, for example, is verboten. They are, however, allowed to bet that prices will go down by selling short. Armed with the ability to foresee the future, Hindsight Capital had another fantastic year, even if its ability to sell short was not as useful as usual, as almost everything seemed to go up. Like many hedge funds, it dabbled in private markets more than in the past. As the year opened, the fund had bought up a fleet of rental cars, and cornered a huge supply of used cars. It had also chartered several large container ships for the trans-Pacific routes. Those investments have more than doubled. They’ve been fantastic. But so have the investments in public markets. Here, then, are Hindsight Capital’s trades of 2021: This takes advantage of the collapse in the Turkish lira, which instantly made any trade denominated in lira look that much better. It was obvious as the year began that Turkish inflation was rising, and that President Recep Tayyip Erdogan was increasingly unwilling to leave monetary policy to the central bank. He has long made it known that he thinks higher interest rates lead to higher inflation. Thus, thoroughly predictably, Turkish monetary policy suffered a year of turmoil as Erdogan switched staff again and again. By the year’s end, inflation was more than 20%, the central bank had cut rates three times — and the lira had depreciated by more than 50% against the U.S. dollar. Money illusion insures that 100 Turkish lira invested in the S&P 500 could turn into 281 lira in December, before the government at last intervened. By the end of the year, the S&P was up 28% in dollars, and 126% in lira.  Long Ethereum/Short Silver Cryptocurrency steadily established itself in 2021 as a lasting factor in the financial universe. New “coins” proliferated, but Hindsight saw that the greatest opportunity was in Ether, long the second-most widely held cryptocurrency after Bitcoin. Transactions in it embed smart contracts. As financiers looked to offer services with crypto, they often found Ether the easiest way to do it. But while crypto seeks to provide a new means of exchange, it’s also attempting to be a new store of value, taking on a role that for centuries has been filled by precious metals. With inflation rising, the demand for hedges against it rose — and crypto increasingly displaced metals. Shorting silver futures (down 13% for the year) and putting the money into Ether (up 400% despite a selloff toward the end of the year) on Jan 1. produced a gain of 480%:  Long MOVE/Short VIX
Volatility was close to inevitable in 2021 as the world awaited evidence whether it had finally escaped the pandemic. What Hindsight Capital foresaw was the survival of “TINA” — There Is No Alternative. Bonds would grow ever more volatile as inflation increased, but equity volatility actually fell. The more concern there was about bonds, the argument went, the more reason to trust equities instead. The VIX index of equity volatility fell 25% as the MOVE index of bond volatility rose 60%. The rise was bumpy, but by the end of the year a trade of shorting the VIX and putting money into the MOVE had returned 112%.  Long Vietnam Ho Chi Minh Index/Short BNY Chinese ADR Index China has long been trying to shift its economy away from a reliance on cheap labor and exports. Hindsight Capital sensibly bet on it to succeed, and saw that neighboring Vietnam, where wages are much lower, was perfectly placed to benefit. The gloriously named Ho Chi Minh index gained 35% for the year. Meanwhile, Chinese President Xi Jinping’s increasingly authoritarian and anti-capitalist rhetoric convinced the firm to take cover ahead of a looming private sector crackdown, which would damage Chinese stocks. By placing a short on Chinese companies’ American Depositary Receipts (down 48% by the end of the year), capturing the largest companies and their exposure to sentiment in the U.S. affected by deepening geopolitical discontent, Hindsight maximized its gains.  - The “I’m Not Dead Yet” Retail Trade
Long Mall REITs/Short Home Entertainment Stocks
Nothing matters more to the success of an investment than the price at which you buy it. By the end of 2020, home entertainment stocks were priced as though we would all spend the rest of our lives indoors, while retail malls’ price assumed that bricks-and-mortar retailing was dead. Both were exaggerated, and the economy began to open again. As a result, shorting the S&P 500 home entertainment sector (down 19%) and putting the proceeds into the Bloomberg regional mall index (up 83%) made Hindsight Capital a return of more than 120%.  - The Trouble with Clean Energy
Long Natural Gas Futures/Short Solar Energy Companies
As 2021 started, the age of clean energy had arrived — but it wasn’t at all obvious that the world was ready for it. Hindsight positioned for the transition to go wrong. New sources of clean energy proved unable to provide as much power as hoped, forcing energy suppliers to resort to natural gas instead. In Europe, this was exacerbated by geopolitical tension over the gas pipelines coming from Vladimir Putin’s Russia. That led to an extreme price squeeze. Shorting the Solactive solar power index (down 27%) and putting the proceeds into natural gas futures for the British market (up 275% for the year having been up 700% at one point in December) yielded a return of more than 400%.  Long Oil Exploration Companies/Short Clean Energy Stocks If anything, dirtiness was an advantage for energy sources in 2021. Oil prices surged, quite predictably, and Hindsight Capital positioned to capitalize on it as much as possible by buying the stocks of oil-drilling companies (which gained 85%). To finance this, the firm shorted the S&P Global Clean Energy index, which entered the year overpriced on a wave of enthusiasm for ESG investments. In 2021, it dropped 25%. The return: 148%.  - The Great Real Estate Trade
Long U.S. Office Property/Short High-Yield Chinese Property Developer Debt As 2020 ended, office property was priced on the assumption that the office was over. We would all spend the rest of our lives working from home. That was an overreaction. Meanwhile, Chinese authorities had started trying to rein in speculation in real estate that had boomed for years on the basis of freely available credit. Shorting the FTSE index of high-yield Chinese property developer bonds (down 43% in yuan terms), and putting the proceeds into the Bloomberg U.S. office property REIT index (up 17%), made 105%.  Long Container Freight & U.S. Trucking Companies/Short World Airline Stocks The sudden stop of 2020, followed by the sharp fall in demand, virtually guaranteed that the world trading system would come under pressure once it tried to resume. Continuing pandemic outbreaks at port cities in China, a country that was still attempting to maintain “Zero Covid” and reacted with sweeping lockdowns, made that even more of a certainty. Chinese container rates more than doubled. Hindsight Capital also put money into the S&P 500 trucking index (up 68%), paired with a short in airlines (down 5%); the attempt to transport cargo came back in full force, but the demand for passenger travel remained depressed. That trade made 80%.  - Pressures of Pandemic Life
Long Coffee Futures/Short Brewery Stocks
Those transport problems had effects on commodities. Demand for coffee increased in the miserable circumstances of 2021, only to meet limited supply. Demand for beer, a drink people usually prefer in social occasions, was weak. People still didn’t spend much time in bars. So Hindsight Capital shorted the S&P 500 brewers index (down 25%) and put the proceeds into coffee futures (up 77%). That made 140%.  - Bonus Trade: Revenge of the Indexers
Long SPY/Short ARKK In 2020, there was intense excitement over the ARK Innovation exchange-traded fund, managed by Cathie Wood, who took a place with previous luminaries like Bill Miller or Peter Lynch. Money poured in to ARK as the fund’s holdings of speculative tech stocks boomed. The internet was full of merch; if you wanted a Cathie Wood T-shirt, you could get one. These were all signs of a blatant peak; and the flow of money into the fund made it harder to make money, as it obliged ARK to take on bigger holdings. That had happened many times before when great performance prompted a flood into funds with limited capacity. Hindsight isn’t allowed to buy individual securities, but its managers confidently predicted that buying a passive ETF tracking the S&P 500 (up almost 30%) and shorting ARKK (down 21%) would pay off in a big way. It did, making 60%.  Hindsight Capital, in case you hadn’t worked this out yet, doesn’t exist. And nobody could possibly take a series of risks like this without having some insurance for the possibility of being wrong. We can torture ourselves with the profits we could have made with hindsight, but there’s no way we would gain to the fullest. Hindsight Capital isn’t a fair benchmark. Does this mean there’s no point in the exercise? No, not really. Having a clear grasp of the most likely macro scenarios is always a good idea, and all of Hindsight’s trades did appear to make a lot of sense at the beginning of the year. And it’s also noticeable that the big money came from reversals. In trade after trade, Hindsight made huge money from seeing that markets and investors had overshot, and betting on them to come to their senses. Value investing, as pioneered by Benjamin Graham in the 1930s, has had a bad press recently. Value stocks, defined as those that look cheap compared to their fundamentals, continue to disappoint. But Graham’s basic approach is to zig when the market zags, or to assume that there is a paranoid individual called Mr. Market, who periodically gives you an opportunity to buy stuff for far less than it’s worth. It worked in the 1930s. And bold contrarianism also worked beautifully for Hindsight Capital in 2021.
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