A paired trade — long one asset, short another — can, with the addition of leverage, yield market-busting returns.
My introduction to this concept was through Jeffrey Gundlach, the CEO of DoubleLine Capital, a Los Angeles-based firm that deals mainly with bonds.
That positioning hasn’t prevented Gundlach from opining about stocks and other assets, however.
Famously, in 2012, he advocated shorting Apple and going long natural gas, arguing with flair that if he “were one of the nutty hedge fund guys, I would go short Apple, long natural gas, and leverage it 100x.”
Gundlach never undertook this trade, but the financial world kept track of it, and as it turns out, it paid off big time. “His call is looking incredibly savvy now,” I wrote in 2013.
“Natural gas moved steadily northward in price over 2012, returning over 50 percent. Apple plunged from its autumnal highs; now it’s within a sullen striking distance of Gundlach’s stated target price, $425. So if you’d taken Gundlach’s advice last year, you’d be up A LOT by now.”
Of course, picking the wrong long and the wrong short can have the opposite effect, as Greenlight Capital’s David Einhorn is now learning with General Motors and Tesla.
“Both of Einhorn’s plays are in dire need of a catalyst,” Bloomberg’s David Welch reported.
“Despite record earnings, GM’s stock is no higher than its 2010 initial public offering price. And Tesla, which already burned through about half the cash it raised in the first quarter, is up more than 40 percent this year,” Welch wrote.
This situation has led Einhorn to label Tesla a bubble stock, which is a bit like saying water is wet, while advocating for a dual-stock-structure plan for GM that has met with brick-wall resistance by the carmaker.
Einhorn is right, but still wrong
On fundamentals, of course, Einhorn should have the right play. General Motors has seen its stock underperform the S&P 500 by a broad margin at the same time it’s been raking in money amid a US sales boom; Tesla, meanwhile, has generally failed to execute on its delivery goals and has been incinerating capital at a pace impressive to even seasoned auto-industry executives, who are accustomed to setting million-dollar bills on fire.
What he lacks is Gundlach sense of timing — and perhaps some of Gundlach’s provocative coolness toward assets that could be out-of-step with macroeconomic forces. Apple was clearly a survivor of the financial crisis and had probably enjoyed more investor enthusiasm than was called for. Natural gas, by contrast, was logically poised for a run, as the US economy recovered.
GM was also well-placed for a surge after its 2010 IPO following a bankruptcy, but persistent skepticism about the auto sectors (minus Tesla) prevented the company from reaping gains while the US sales market rocketing from 12 million to 13 million annually to a record 17.55 million in 2016.
Tesla, on the other hand, is the only major growth trade in the auto sector (Ferrari has also done well, but the luxury brand, spun-off from Fiat Chrysler Automobiles, has only been trading since 2015). In fact, it’s also the only significant growth trade in the tech sector these days, given the lack of IPOs from most of the big names.
It’s not clear whether Einhorn set up his holdings this way. His GM stake is over 2% and has led him to agitate for board seats. His Tesla stake is reportedly pretty small and likely just a way for him to play the downturn, which will invariably arrive (Tesla shares have a long track record of surging and swooning).
It’s also true that Gundlach’s speculatively paired trade involved a tech stock and a commodity, so it was big-picture by definition. But it does tell you something about hedge funds — go bold or go home.