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Shorting specialist Clunie: the ‘flower in the desert’ trade

Shorting specialist Clunie: the ‘flower in the desert’ trade

Citywire + rated James Clunie took advantage of last year’s uncertainty in the financial sector and saw positions increase in price five times.

Clunie, who runs the Jupiter JGF Global Absolute Return fund, said in an investment update that some investors were worried about share prices of banks such as Deutsche Bank falling.

However, Clunie believed that is was unlikely that banks would suffer the same way that they had done in 2008.

‘We picked up some call options on ING and CommerzBank. The three year and five year duration, well, they were just giving them away,' he said.

'We picked a few of them up because we felt if the yield curve in Europe changed shape, then these banks could benefit from it. As it happens conditions have stabilised, recovered and these have exploded upwards in price.

‘They were tiny purchases, but the price of ING has at least quintupled in the fund. So that was quite a useful flower in the desert, a small seed in the fund that could explode to the upside if conditions changed, if there was some rain in the desert.’

Clunie has a 8.4% long exposure to financials and a -4.2% short exposure to banks. It is the largest long sector allocation in the fund.

Bubble blow-off

On a country basis, Clunie has a -20.9% exposure to the US. He said the stocks in the country seemed overpriced and had reasons to fall.

‘You can argue that the US is in a bubble. It is about two standard deviations away from its cyclically adjusted P/E norm. That is one definition of a bubble.

'When you are in a bubble you have a flare up, a big surge at the end as you get the maximum exuberance and we worried about that.’

Clunie added he was taking at odds with the consensus view of strength in the US economy and value for money being found there.

‘What we found is call options on the S&P 500 were really cheap relative to puts recently. That was interesting. Almost everyone else who has a good track record is long US equities.

'They have just trebled holdings and they are very popular, but we are worried about a drop because it is quite clear that the market is expensive,’ he said.

‘They are buying put options and those put options are very popular and very expensive. They are long US equities and are buying expensive hedges.

'We are short US equities and able to buy these cheap hedges, these low price call options, which hedges against the opposite scenario, which is the bubble blow-off.'

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