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Bronte Capital Shareholder Letters: The Generalized Short-Selling Debacle Of 2013

Bronte Capital has racked up one of the most impressive performances of its hedge fund peer group over the past six years. From inception during the first-half of 2009, to the beginning of July 2014, when Bronte Capital pooled its funds, the group’s separately managed accounts produced an annualized return of 31.5% and cumulative return of 293.2% after fees.

Bronte Capital: The year of the short

2013 was the year of the short. At the beginning of the year, the market held large short positions in high-profile short targets such as Herbalife Ltd. (NYSE:HLF), Tesla, and Netflix, Inc. (NASDAQ:NFLX).

At the end of 2013, Bronte Capital declared in its year-end letter to investors:

"...we are now seeing people pile into worthless stocks on worthless analysis and being fooled by momentum into believing they are geniuses. This will end sometime and short-sellers will again have their day. We look forward to making real alpha on the short-book again.

We are now getting long a few high-short interest names though as a hedge against a further generalized squeeze. We are rigorous about investigating the short thesis. Only one name springs to mind – Blue Nile. Blue Nile is an online jeweler and a very fine company sporting a very high valuation. The short-thesis is essentially a valuation thesis. We think the short-thesis is only marginally wrong – but the high short-interest skews the trade in our favor. Still this sort of “trade” warrants only a single digit percentage of our portfolio. It’s just a little “spivvy” for us. Still it’s not a bad place to be. We are buying high-quality companies at the wrong price but as a necessary hedge against crappy companies shorted at even more egregious prices. We stress however that typically the long portfolio stands on its own merits." -- Bronte Capital year-end 2013 letter to investors of its...