William Browder, the Founder of the hedge fund Hermitage Capital Management, is afraid of the market and he has completely changed his style of management, said in an interview with a Belgian publication L'Echo.be. Below is a translation of the interview.
William Browder, the founder of the hedge funds Hermitage Capital Management, is not like other hedge fund managers. He gave this interview in Paris just before the start of a hearing on the case of Magnitsky at the council of Europe. Sergei Magnitsky was a Russian business lawyer for Browder’s investment advisory firm Hermitage Capital Management before being put in a prison in Russia. He died shortly after in the prison. Bill Browder was soon expelled from Russia as well and declared an unwanted person in Russia. William Browder has not lost his faith in emerging markets where his funds remains invested, except Russia. But he said that he has completely changed his management style since the beginning of this year. William Browder has been pessimistic about the markets since a meeting with the political leaders at the Davos Summit. He then explains why:
L’echo: The volatility of the markets shows how investors are afraid at the moment. How do you explain this?
William Browder: Investors have good reason to be afraid at the moment. There is an unravelling of the European sovereign debt crisis, a deficit out of control in the United States and then the revolutions in the Middle Eastern countries close to major oil producers. Most economic indicators suggest that the global economy is close to slipping into recession. All these reasons, even taken individually, are sufficient to make the markets go down. All together, they should send the market much lower than they are now.
L’echo: What prevents the stock markets from collapsing?
William Browder: Market support is based solely on government intervention. Central banks print money whose official name of this operation is “the quantitative easing”. The other market support is based on low interest rates, which should be 3 to 5 % higher than they are now, but due to manipulation by central banks, they are low. This gives a terrifying combination for any holder of an asset, because the price of an asset depends on the forces unrelated to the markets.
L’echo: The search for the intrinsic value of an action is therefore no longer possible?
William Browder: I prefer saying market value rather than intrinsic value. If interest rates are allowed to rise to the level where they are supposed to be with no government intervention, everything would change. For example, real interest rates in the United States should be around 5% instead of 0.25%.if they were to rise from 0 to 5%, the 30 year Treasuries would fall by 50%.The apple stock would lose 38% like other similar assets. Asset prices are completely all artificial.
L’echo: Can we apply the same logic on price of gold?
William Browder: Gold is in a particular situation. Any asset goes up by 100% in a short period of time has a significant downside risk. On the other hand, gold prices are high because they compensate for the weakness of all major currencies. Gold has become an alternative currency to other currencies that depreciate. And if Greece is out of the euro area or if there is an additional problem with the debt of other Western countries, the price of gold may go higher. The strength of gold is based on the lack of confidence in the inability of governments to protect the purchasing power of their currency. I have always gold. I bought one, 1000 dollars an ounce. And I am not selling it soon.
L’echo: But gold prices flirt with the 2000 dollars an ounce. Is there still time to buy?
William Browder: I would not advise anyone to buy at whatever the price. I myself was reluctant to purchase gold at 1000 dollars…..
L’echo: Gold has no use, unlike all other commodities...
William Browder: Well, it is an advantage for the gold. The raw materials are used for industry. In a recession, they undergo a correction. To be convinced, just look at oil prices recently. Gold as currency retains its value, unlike other commodities.
L’echo: August has been particularly a difficult month for hedge funds. Was this your case too?
William Browder: My funds are fully "market neutral", meaning that each (long) position corresponds to its opposite (short) position. When the markets suffered a sharp correction in August, I had no direct exposure to it. Result was that, when markets lost 20%, we limited our losses to 3%. Since the beginning of the year, our performance is 2%, against -13% for emerging markets.
L’echo: Did your clients fear and did they threat to withdraw their money?
William Browder: They have been calm, but I was afraid and I have reduced the net exposure of my portfolio from 100 to 0%. We were able to avoid the chaos of the markets. During the World Economic Forum in Davos in January, I spoke to different people and I realized that most of the politicians present there were optimistic, Even after they had just seen all the major problems of the world economy. Markets reflect the same feeling that politicians who govern us. They ignore the problems. When I returned from Davos, I asked my team to reduce the net exposure of our portfolio. This has avoided being in the red since the beginning of the year.
L’echo: In China, There has been a wave of scandals involving listed companies. Some hedge funds have suffered. Your funds specializing in emerging markets, were you touched by these scandals?
William Browder: I invested in China on the rise and fall (On the fall, I invested in BYD, the car company of which Warren Buffett is a shareholder, e.d.).We were not affected by the scandals. But this shows that emerging markets should be treated more carefully than Western stock markets.
L’echo: The current situation is comparable with 2008?
William Browder: You cannot compare the current situation with that in the aftermath of the collapse of Lehman Brothers. For two reasons; The first is that The bankruptcy of Lehman Brothers was completely unexpected in 2008, but on the other hand, this time, the scenario is worse because they are more companies that are likely to fail, but the countries as well. The crisis of 2008 has been delayed by the intervention of governments which have injected massive amounts of money into the system. We are in the second stage of the financial crisis that began in 2008.
L’echo: The exit from this crisis will be slow and painful, like the Japan’s situation?
William Browder: Each country has its own characteristics. But the problems of economies and markets in the U.S. and Europe make it difficult for any investment strategy to increase the markets in the long term. We must remember that over 20 years, the Nikkei lost 80% of its value.
L’echo: But the institutional investors such as pension funds, insurance, and even mutual funds do not have the possibility to invest on the fall of the markets (short position). Their mandate requires them to be long in the long term. How will they manage these market conditions?
William Browder: We will attend the bankruptcy of pension funds and insurance companies. Companies with long-term commitments will have problems. Pensioners will be affected by these inevitable problems. The next decade will be difficult for everyone because of the accumulation of debt by governments and by individuals.