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The COVID-19 crisis has been a time for introspection at hedge fund VGI Partners (ASX: VG1), which after suffering from poor timing with the market rebound has now scaled back its short positions significantly.
This morning the fund announced a loss of $45.5 million due to lower net tangible asset (NTA) values, but investors were given good news through a 50 per cent increase in VG1's dividend to 1.5 cents a share and plans for an on-market buyback for up to 10 per cent of issued capital.
These announcements helped send the VG1 share price up almost 5 per cent to $1.92, but it was comments from VGI Partners founder and portfolio manager Rob Luciano (pictured) in an investor briefing that showed just how much management's outlook on markets has changed.
"In a world of endless money printing and government stimulus, the traditional short selling approaches may not work as effectively as they had done before," Luciano said.
"This is because we expect investors will look to near-term volatility in earnings."
His message was essentially that unless a company is committing fraud on the scale of German electronic payment services provider Wirecard, no one is really going to care at the moment.
"In this environment, it's too easy for a management team to cover up weak underlying profits and accounting shenanigans with COVID-related excuses and provisions, and also government assistance," Luciano said.
VG1's short exposure has been reduced from 47 per cent of its portfolio in April to just 9 per cent at the end of June, with only two short positions remaining.
"While we won't be increasing VG1's short exposure to prior levels until the macro environment changes, the VGI Partners investment team are still doing its work to identify companies that meet our usual criteria for short selling, and what we refer to as red flag analysis," he said.
Additionally, the company has made a drastic shift in its currency position as well, moving to a 100 per cent Australian dollar exposure.
"This is significant as VG1 started the year with 100 per cent exposure to US dollars, and moved to a 50 per cent hedge position in June," the fund's founder said.
"Changing VG1's strategic currency positioning came after several months in which the performance of the Australian dollar was highly correlated with global equity indices and risk asset prices.
"At the same time, changes in the macro environment meant that we are now far less confident that the Australian dollar is fundamentally overvalued than we were previously."
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