In Defense of John Hussman December 2, 2014 by David Horn Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives. John Hussman is a polarizing figure. The performance of his Strategic Growth Fund (HSGFX) is in the fourth, fourth and seventh percentile in one-, three- and five-year rankings, respectively. Hussman is chided for missing the rally. Worse, he s actually experienced a drawdown over the past six years. When he posts a chart or commentary on Twitter, he is targeted with vitriol. It is no mystery why he receives criticism, but if your inclination is to disregard his work as just plain wrong, consider the following: From his fund s inception in July 2000 to 2008, Hussman outperformed the S&P 500 (including dividends) by more than 12% annually. I appreciate he has given back that outperformance. And I am not suggesting Hussman is beyond reproach or that he cannot be criticized. He s fair game, like everyone else who manages money for a living. But if he s an idiot now for underperforming and missing a rally, was he a genius earlier for outperforming and doubling his clients money in a period when the SPX fell by 30%? What does the prevailing attitude toward Hussman say about our eagerness to apply labels? Taking a closer look The following is a list of criticisms I ve read regarding Hussman s fund and overall strategy. : 1. Hussman s drawdown in the last six years is unacceptable. 2. Hussman is underperforming the S&P 500 by 9.85%/year over 10 years. 3. He is too far in the hole even if he is eventually proven right. 4. A strategy of buying puts on the S&P 500 is flawed because of the negative carry. 5. Betting against the S&P 500 over long periods is a loser s game. Page 1, 2018 Advisor Perspectives, Inc. All rights reserved.
6. Hussman took advantage of his investors, and they should not have been subjected to those returns. Let s address these issues: 1. Hussman s drawdown in the last six years is unacceptable. HSGFX peaked on September 30, 2008 at an NAV of $14.19. At a current price of $9.13, that is a drawdown of 36%. Here is a chart of HSGFX since inception in July 2000: Exhibit 1 Page 2, 2018 Advisor Perspectives, Inc. All rights reserved.
Let's put this drawdown into context. From September 1, 2000 to October 9, 2002, the S&P 500 total return (SPTR) fell 47%. From October 9, 2007 to March 9, 2009, it fell 55%. But let's hold Hussman to a higher standard. One could argue that active managers are paid to avoid the drawdowns that the market suffers. Fine! Fire all mutual fund managers that have drawdowns the size of Hussman's. But if you start looking at mutual fund performance during the 2008-2009 period, you will quickly lose count. How many luminaries that CNBC marched out daily had larger drawdowns? Where's the vitriol? Where's the outrage? Why aren t there calls for these managers go give back their fees? Why don't we see the charts of all the crummy mutual-fund performers during 2008-2009? Because it would break Twitter's servers. I m not finished with this thought, but let's move to points 2 & 3: 2. Hussman underperformed the S&P 500 by 9.85%/year over 10 years. 3. He is too far in the hole even if he is eventually proven right. Here's what we see if we look at Hussman's semi-annual report from December 2008. Exhibit #2 Page 3, 2018 Advisor Perspectives, Inc. All rights reserved.
As I mentioned in the introduction, during a 7.5 year span when the S&P 500 fell by almost 30%, Hussman doubled his clients money. He outperformed the S&P 500 by over 12% a year. Let s take another look at Exhibit #1. Hussman outperformed the S&P 500 since inception until this year. Which clients is Hussman taking advantage of exactly? Not the investors that were there from day one. I suspect it would not take much of a drawdown in the overall market for him to regain his outperformance since inception. What about the investors who purchased shares exactly 10 years ago? Well, during that 2000-2002 47% S&P 500 drawdown, Hussman was up 47%. Hussman currently claims the S&P 500 is overvalued by 100%. So if it gets cut in half, who s to say he doesn t reclaim that lost alpha? 4. A strategy of buying puts on the S&P 500 is flawed because of the negative carry. In Exhibit #1, Hussman actually breaks out how hedging has impacted his performance. The blue line is his fund, and the purple line is his fund unhedged. For the first 10 years of Hussman s fund, hedging paid off. Lately it hasn t. But you cannot say categorically that put buying is bad. Page 4, 2018 Advisor Perspectives, Inc. All rights reserved.
Imagine that I offered you a put option that paid off 100:1 if the SPX fell below its 200 daily moving average (DMA) anytime over the next three years. I suspect every reader would gladly buy this contract. Most people would buy a put on the S&P 500 if the price was right. If critics claimed Hussman overpaid for puts on the S&P 500, we would be having a different, and much tougher debate. 5. Betting against the S&P 500 over long periods is a loser s game I suspect Hussman would agree with this statement. Go back to exhibit #1 again. From 2000 to 2003, all of Hussman s gains were a function of hedging (the purple line is unchanged since inception). Then the blue and purple lines move in relative lock-step. It does not appear that Hussman was doing much hedging from 2003-2006. Betting against the S&P 500 over long periods is a loser s game. But there have been a few periods in the past 14 years when it s been terrific. It sure worked well from 2000-2002. It worked great during 2007-2008. And it doesn t appear Hussman did much hedging during the 2003-2006 period (performance was strong with the market). Yes, Hussman has hedged lately with no success. But there are periods when hedging worked, and there are periods when he didn t hedge. This also goes against the theory that he s a permabear. Hussman believes we are in a bubble. If he s proven right (like he was in 2000 and 2007), then hedging will prove to be very smart. 6. Hussman took advantage of his investors, and they should not be subjected to those returns. Clearly this statement relates to experiencing a drawdown during the rally of the past six years. As I addressed earlier, a Hussman investor from inception also missed out on two massive drawdowns in the S&P 500. Again, if Hussman is proven right about this being a bubble, then his investors will likely do well. Will his critics turn their sights on other managers who might very well give back all of their gains of the past few years? A few more thoughts I am not making light of Hussman s drawdown and his performance over the past six years. I m not disputing it or making excuses for it. But Hussman s critics don t look at the entire body of work. Hussman is the focus of such criticism not because of the size or duration of his drawdown, and not because of his performance since inception. He is the target because of one thing; his timing. The reason Hussman gets pilloried on Twitter is because he is down when everyone else is up. That is fatal in this business. Earlier this year, Hussman s performance was equal to that of the S&P 500 over the prior 14 years. And yet the criticism started earlier than that. If he had his drawdowns in 2000 and 2008 like everyone else, would anyone care about him one iota? Page 5, 2018 Advisor Perspectives, Inc. All rights reserved.
My guess is no. And this is why so many managers hug the index. This is why there s safety in the herd. Stop encouraging that behavior! What message are you sending to active managers? Do not dare miss a rally. In the late 1990s, technology was 35% of the S&P 500. Portfolio managers had a choice. Own tech, or look nothing like the S&P 500. What do you want your managers to do? Stop encouraging herding! If you want to feel sorry for a cohort of investors, feel sorry for those in funds that hug the index. And there s another reason nobody should feel sorry for Hussman s clients. I know of no other mutual fund manager who goes to greater lengths to explain his investment methodology. Everyone who bothers to read his weekly communications knows exactly what they re getting with Hussman. You can t say that for most fund managers. Why do people assume Hussman s clients don t understand his investment philosophy? What if they own Hussman as a countercyclical hedge? Hasn t he proven to have achieved that over the past 14 years? Go ahead and mock Hussman, but then go read what he writes. The gist is that future U.S. equity returns are going to stink. Do you know who else has echoed that sentiment in the past two years? GMO See their monthly 7 year expected return targets or their quarterly letters. They say we ll be in bubble territory is the S&P 500 hits 2,250, which is not too far away. Ray Dalio See here Cliff Asness In 2013 he said a 60/40 portfolio has been cheaper than it is now 98% of the time. Asness has done terrific work on Shiller s cyclically adjusted price-earnings ratio (CAPE) and wrote a paper dismantling many of the popular criticisms of the metric. None of these investors are permabears. Yet all share some of Hussman s concerns for future returns. We don t have the opportunity to get into the heads of these great investors. We just get snippets here and there. Hussman comes to many of the same conclusions, and he writes weekly. It s a unique perspective and it s free. That s rare in a world where most people are permabulls or doomsday prophets. Maybe Hussman wasn t the genius people thought he was, but he s not the idiot that s mocked on Twitter, either. Use him as a resource. Consider the merits of his arguments and ask yourself how you might be impacted if he s proven right again. David Horn is a portfolio manager with Kiron Partners LP, a long/short fund he started in 2006. He is also an adjunct professor at Columbia Business School. He co-teaches Applied Value Investing with a friend and fellow CBS alumnus. His first job out of college was at Sanford C. Bernstein. It was the late 1990s and he saw first-hand how quickly sentiment could change regarding perceived intelligence of an asset manager. He s Page 6, 2018 Advisor Perspectives, Inc. All rights reserved.
seen it many times over the course of his career, and has experienced it himself. Since inception, his fund has provided counter-cyclical exposure to his partners. You can email him at dhorn@kironadvisors.com. Page 7, 2018 Advisor Perspectives, Inc. All rights reserved.