Hedge fund manager abandons short position on Bill Gross’s firm

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Not every short-selling strategy turns out as planned. Sometimes hedge fund managers who make a gutsy call that a stock will drop in value find themselves turning tail and covering their positions quickly, cutting their losses if any loose threads threaten to unravel their thesis.

Such is the fate of a daring trade one Canadian hedge fund manager undertook a few weeks back. Streetwise readers will recall the manager's idea was to short the stock of U.S. bond king Bill Gross's new employer Janus Capital Group Inc., by borrowing stock and selling it, with the intention of buying it back at a lower price.

The idea stemmed from the fact that investors pushed up Janus's stock market value by $1.1-billion (U.S.) after the well-known Mr. Gross joined the firm last September. But share prices of fund management firms can't rely on star power alone. The hedge fund manager, who asked not to be identified, figured Mr. Gross would have to bring in $47-billion in new assets from customers in the next year or two to justify Janus's lofty share price. So far, very little money has followed Mr. Gross to Janus, and much of it is his.

But, then Janus on Jan. 22 reported results for the three months ended Dec. 31 and they were much better than expected. Janus said it earned 24 cents per share, up from 21 cents per share a year earlier and 20 per cent higher than analysts were expecting. Even more significant, Janus recorded net deposits of $2-billion in the quarter. Never mind that 35 per cent of that came from Mr. Gross himself: it was the firm's first net positive quarter since 2009. The stock rallied; it closed Thursday at $18.30 U.S., about 50 per cent higher than peak trading levels in the month before Mr. Gross joined Janus in late September.

This week, the hedge fund manager covered all of his short position on Janus, buying the shares back at a higher price than he had sold it for when he shorted the stock, taking a loss on the position. "When the facts change you have to change your mind," the manager told Streetwise. "You have a certain thesis when you make investments, and you have to reassess your thesis periodically. When facts don't overwhelmingly support your thesis you have to make adjustments."

With Janus running at a pace to earn $1 per share annually – whether or not more assets follow Mr. Gross to the firm, which is still far from certain – "the stock doesn't seem as expensive after the big [earnings] beat, and … that to me doesn't qualify as a compelling short any more," the hedge fund manager said. "It's always better to admit a mistake and take a smallish loss and live to fight another day." Besides, he points out, in the fund management business, "If we can [be right] 60 per cent of the time we're pretty good."