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Hedge fund VGI Partners (ASX: VG1) only made a break-even return in the first four months of 2020 after its short selling positions were caught off-guard by massive market gains in April.
The fund's short positions helped it achieve a 1.4 per cent positive return in March, compared to a negative return of 7.7 per cent for the MSCI World Total Return Index (AUD).
In a letter to shareholders today, VGI Partners lamented not lifting its short position earlier and explained its outlook was at odds with expectations around a V-shaped recovery.
"We have unfortunately made a number of costly unforced errors; firstly, just as we should have been quicker to cut some of our Long Investments where the facts had changed, we should have increased our Short exposure a little earlier than we did in March," the company said.
"Then, once we had repositioned the portfolio to reflect our concerns over the impact on company profits of substantially reduced household incomes, we should have been quicker to recognize that the announcement of unprecedented stimulus and wage-replacement programs around the world would defer the negative consequences for a number of companies in which we had initiated Short Positions."
In April VG1 recorded a negative 4.5 per cent net return, with a positive 4.7 per cent return on long investments offset by detractions for its short positions and long-term strategic currency positioning.
"We did not anticipate that April 2020 would mark the best monthly gains for many market indices since 1987," said the company, which had its lowest net market exposure since the GFC.
"During the month, markets increasingly priced in a rapid rebound in economic activity - what some may refer to as a "V-shaped recovery".
"Markets have stuck firmly to their view that, for most companies, profits will be higher in 2022 than they were in 2019. We strongly disagree."
The fund said while short-term income replacement initiatives mean that the unemployed receive more support today than previously, it does not believe the global economy can rebound quickly from the rapid rise in unemployment, reduced household incomes and changed consumer behaviour.
"Just think for a moment about how quickly you expect to return to your previous way of life when it comes to dining out, shopping and travelling. We doubt that a so-called V-shaped recovery will eventuate," VG1 said.
"We now see more reason to be cautious regarding the outlook for Australia as a consequence of the pandemic.
"The Australian economy may ultimately be particularly hard-hit by the virus due to the significance of sectors such as tourism and international education. It is now clear that these sectors will be negatively impacted for a long time."
The company's portfolio is predominantly exposed to the US Dollar, so it was also adversely impacted by a strong performance for the Australian Dollar.
"We are deeply disappointed to now be writing to you following a month where our performance has fallen well short of the broader market," the fund said.
"However, while we always strive to preserve capital this does not mean that we won't have periods of relative underperformance, or even negative performance."
VG1 also claims the high-quality companies it has invested in set to benefit from the coronavirus-triggered acceleration of themes it has been following for some time.
"To give just two examples, housebound consumers are increasingly favouring online retail over bricks and mortar, while a fear of infection means that even those transactions taking place in physical stores are increasingly migrating from cash to card," the fund said.
"Through our holdings in Amazon and MasterCard, these two themes represent over 25% of the total investment portfolio. We believe that both of these companies are positioned well for the long-term."
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