It has been a difficult year for hedge funds with the HFR Fund Weighted Composite showing just a 3.4% gain through June against the S&P up 16.9%.
Anson Funds, a contrarian hedge fund out of Canada, was spotlighted in Zero Hedge’s “Best and Worst Hedge Funds of 2022” who noted “One hedge fund which we were unfamiliar with, which has posted solid returns [..] is the $1.6 billion Anson Funds. What we find most impressive, is not so much the fund’s 2022 return (where its 7.6% return still made the top 5%-ile of all funds for the year) but its performance in the prior two years, when it posted 40%+ profits in both 2020 and 2021. Just as remarkable: in its 15 year history, the fund has had just one down year … allowing it to generate a 800% total return since 2007.”
Charles Mackay, author of Extraordinary Popular Delusions & the Madness of Crowds, wrote that “credulity is always greatest in times of calamity”. We have seen two such calamities over the last two years in Covid and Russia’s invasion of Ukraine. Anson prides themselves in seeking out such speculative bubbles and taking the other side.
One area of focus was the electric vehicle (EV) sector, where high hopes of finding the next Tesla led many investors to buy into management promises and underwrite unproven businesses at lofty valuations.
It has been a bumpy road. Lordstown Motors Corp. filed for bankruptcy protection in June, after its stock plummeted 55 percent in one year. Rivian, the little EV company that could, saw its stock fall from its IPO high of $129.95 in November of 2021 (over $100 billion market cap with no profit) to less than $15 in June of this year. Nikola Motors, part of both the SPAC and EV boom, has fallen 66% and their founder was convicted of fraud. Canoo lost 82 percent of its stock value in the past year. Faraday Future’s stock is down 82 percent over the same period.
Anson Funds’ Chief Investment Officer Moez Kassam describes his team’s strategy as focusing on trends and trajectories beyond the numbers in a model. The key is understanding the difference between a sustainable trend and a fad, he contends.
“I personally love electric vehicles,” says Kassam. “And I’m rooting for the success of the inventors and dreamers who are breaking technological barriers and making these beautifully engineered cars. But sometimes a great idea is just that and the business model is not there to support it. Investors get caught up in the dream, while investors keep the focus on reality.”
As with many emerging industries, it takes a great deal of research, understanding and even intuition to predict the success of individual companies and specific technologies. Market forces, government mandates and consumer tastes will shape the contours of an investment opportunity. There’s no question that the future is electric; the only real question is which EV companies will make it to the finish line and which business models along the value chain will prove enduring. As Warren Buffet once famously said about investing in the airline industry: “If a capitalist had been present at Kitty Hawk back in the early 1900s he should’ve shot Orville Wright; he would have saved his progeny money.” The point being that world changing technological innovations don’t necessarily make for great investors.
What is the next ebullient frontier? Anson Funds is working diligently to uncover the pretenders in the AI space. While artificial intelligence is sure to forever change the way we live and do business, Anson believes there is a large number of disingenuous management teams that are overstating their prospects.
