Australia hedge funds: Hedgie seeks corporate scumbags
Bronte Capital’s John Hempton takes a unique approach to finding the stocks he wants to short; it has given him a cult following in his native Australia and beyond.
Spend time in the company of John Hempton and you are likely to hear him deploy the term ‘scumbag’.
It’s not that Hempton, an amiable Australian, is a vulgarian afflicted by Tourette’s syndrome. He just thinks the business world has a surfeit of, well, scumbags. And as however unfortunate that might occasionally be for society, it creates investment opportunities for him and his $600 million short-selling hedge fund, Bronte Capital.
“We choose shorts by following bad people, with computers,” says Hempton. “And fortunately for me there are a lot of bad people in the world. We have thousands of scumbags in our database.”
Hempton is a hedge fund manager, contrarian, home truth-teller and iconoclast. If the name rings a bell, you are probably a Netflix subscriber and have seen Hempton’s star turn in the 2018 series ‘Dirty money’, which tracked the misadventures of various corporate ne’er-do-wells.
A former federal treasury official (he specialized in anti-tax avoidance policy), Hempton started Bronte Capital in 2009 to get him out of the house under threat of divorce. Now with $600 million in subscriptions, it’s named after the smart Sydney oceanside suburb where he then lived, known for its fashionable brunch cafés, a gorgeous beach and an idyllic swimmers’ rockpool, an enigmatic portrait of which adorns Hempton’s corporate website.
We choose shorts by following bad people, with computers. And fortunately for me there are a lot of bad people in the world - John Hempton, Bronte Capital
Despite or perhaps because of Bronte’s distinct whiff of ageing surfer bohemia, it’s also the preferred neighbourhood of many of Sydney’s corporate elite, many of whom follow – and have sometimes been skewered on – the tart blog he publishes.
“I’ve sat at those cafes next to people I’ve been shorting,” he says, including a gang boss who also headed up a finance company in Hempton’s sights.
“I would’ve skewered a few more were it not for our defamation laws,” he says mischievously.
A cricket fan, Hempton seems to relish in the national sport of sledging – crushing the self-esteem or confidence of opponents. He has been called a smart arse and a rascal, although Hempton prefers being described as a corporate troll.
The introduction to Hempton’s Twitter account (which has almost 40,000 followers, with the ironic hashtag #ThoughtsAndPrayers) puckishly asks: ‘Are you long a stock that I am short?’
His blogged commentaries can be in equal parts glib and funny, educational and forensic while reminding readers that “the content contained in this blog represents the opinions of Mr Hempton. You should assume Mr Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog.”
Hempton notes that Americans sometimes have a sense-of-humour deficit and helpfully provides a link to Jonathan Swift’s mocking satire ‘A modest proposal’.
“We are not normal, in lots of ways,” Hempton admits.
It’s all very Aussie, but Hempton’s domain is anything but parochial, as he targets everything from bloated Japanese banks through Tesla’s defiance of stock market gravity to a scamming Chinese travel group.
“The attitude might be Sydney, but I’m very global,” he says.
Adversaries have dubbed him, charitably, a gadfly or, according to New York hedge funder Bill Ackman, with whom Hempton has had a long-running rivalry, ‘nuts.’
Ackman is not a Bronte fan. That’s mostly because Hempton and other shorters took him and frothy US pharmaceutical giant Valeant on from 2015 to 2017, a saga tracked in ‘Dirty money’, that eventually cost Ackman’s Pershing Square Capital around $4.5 billion. (Euromoney approached Ackman for comment, but did not receive a reply before publication.)
Name calling only seems to makes Hempton stronger and set off alarm bells.
As the fund puts it: “Bronte Capital chose to base itself out of the noise of New York or London to allow our true views to evolve without the interference of the street.”
When Euromoney meets Hempton at his office in suburban Bondi Junction, a world away from Sydney’s established financial district, he’s bleeding from a leg injured in a tangle with a car while cycling to work just minutes earlier.
We tell him this is a first, that we’ve never interviewed a bloodied hedge fund manager; it is an opportunity for characteristic gallows humour.
“Not before you start, at least,” he quips.
By Hempton’s own description he may be “one of the more left-wing hedge fund managers around”.
But he’s no snowflake, or any less a results-driven capitalist. Although he’s big on governance and transparency, we put it to him that he’s more exercised by how such best-practice ideals intersect with market reality and human nature – or don’t as is often the case.
“Absolutely!” he exclaims. “That’s what I’m most interested in. The world would be a better place if corporate governance were widely practised at a high standard and securities regulators were well run by competent people. But Bronte wouldn’t have a business. Intellectually, I want the world to be a better place. Emotionally, I’ve decided, well, fuck it.”
Our usual case for shorting something is that they are complete liars - John Hempton, Bronte Capital
Surrounded by books, Hempton’s low-key office has an academic air and, with his wild wispy hair, his aspect is that of a donnish boffin. The office bookshelves are eclectic and cerebral, with few of the usual corporate or management titles. One book on the shelf – ‘Spy the lie’ – seems a tactical giveaway; it is a manual by ex-CIA operatives on how to recognize deception.
“Our usual case for shorting something is that they are complete liars,” says Hempton. “But one of the things about complete liars is that they are better at it than my ability to detect it. We have other mechanisms, but we tend not to detect it when they tell us.”
Enter Hempton’s tight young team of analysts and stock pickers, just eight of them.
“I hire very selectively.”
Hempton says he will just as likely hire a mathematician, a statistician or an investigative journalist over a common-or-garden commerce graduate.
“On the short side, identification is almost always by machine, by some kind of data mechanism.” he says. “A typical ‘machine’ as such is that we have identified a fraudulent stockbroker and have manipulated to get on his mailing list. We might even open an account. We don’t mind even losing a bit of money for a look-see, but now we are on his mailing list, the machine is identifying possible shorts. And he’s a shyster, 30% of what he recommends is crap.”
Hempton has shorted 1,100 stocks during Bronte’s 11 year life. He says he never does a company visit when eyeing a short. And exchanging market gossip with peers doesn’t help him reach any decision.
Hempton says you rarely find out what’s going on by talking to fellow investors or stock promoters for shorts or longs.
“The only stockbroker I’m interested in is a dishonest one,” he says. “Maybe scumbags are one half a per cent of society, but when you get to small-cap stocks, they are suddenly 10% to 15%,” he says.
Once Bronte’s data processes have identified a possible short play, “the choices to proceed are always human, mostly mine,” Hempton says. “Two-thirds of stuff goes in the ‘too hard’ basket.”
For the other third, the investigative spadework is done in the office or at less conventional coalfaces, like the time he was at a Bangkok hairdresser to gauge how much its local prostitute clientele used of a particular beauty product from a German company whose stock he was long of.
“They also told me I was very handsome,” he notes.
John Hempton: in Netflix's ‘Dirty money’
Then there was the time he and a friend pretended they were a home-buying couple to see how much money they could borrow as a way to measure bank vulnerability to the Australian property bubble.
Or the time he posed, with his wife’s permission, as a pizza-obsessed, gonorrhoea-infected 250kg computer programmer on a listed dating site to test suspicions it was a scam.
“That with that type of profile, I received hundreds of supposed responses from enthusiastic women. It told me it wasn’t real,” he says.
“Our standard of proof for a short is a reasonably articulable suspicion.”
He gives a hypothetical example: “If you started at a fraudulent broker and you went to a mining company that had a fraudulent geologist and you’re now the CFO of a biotech company, there’s a reasonable chance that it’s a fraud.
“It’s certainly not convictable, you couldn’t put it in front of a jury, but if you are doing 1,100 shorts, on average you are going to be right. And on average we are.”
With the fund’s recent average annual returns of 14% to 17%, Hempton claims Bronte has “the best short record in the world.”
But while the Bronte funds have a reputation as a shorter’s play, thanks in part to Netflix, Hempton says that were prospective investors to join him only to short “they would be disappointed”.
Hempton also takes long positions, invariably holding more by value than shorts.
“The longs are chosen by understanding the business and held for a very long term,” he says. “My turnover on the long book is by most standards shockingly low [four to five years] and my aspiration is to make it lower. I’m not sure why I should turn it over at all – that I do is mostly an indication that I got things wrong.”
And the average length of a short hold?
“Jesus… I wish it were smaller,” he says. “We’ve had shorts for five years. We are not proud of that.”
Hempton says there are two types of mistake in shorting stocks: the ones where the call is wrong and the ones where the call proves ultimately right but must be covered before it turns.
“The second one hurts more,” he says. “It’s also inevitable, [it’s when] the fraud doesn’t connect to reality. If it’s got a market cap of $300 million but it’s worth zero, that’s silly. If it’s got a market cap of $6 billion and its worth zero, that’s also silly, but it’s not 20 times as silly. We have to have a cut-off point.”
As an example, he cites the infamous Indonesia-based gold fraud of the 1990s, Bre-X.
“That went from having a million fake ounces of gold to 183 million fake ounces, and the stock went up 200-fold. But if you had been short even 1%, you were bankrupt.
“One of the questions we ask is if we hit the next Bre-X, how much money do we lose? And part of our control system is to make sure that number is low.”
If you short a $100 billion company on Wall Street, and you are right before all the famous people, that proves that you know what you are doing - John Hempton, Bronte Capital
Hempton says “almost all our [short] book are frauds”, but he has occasionally shorted dying stocks in sunset industries. Research in Motion, the Canadian maker of the Blackberry that was eclipsed by Apple, is one, and is the exception that proves the short-the-fraud rule.
“My longs have been about 2% better than the market – respectable but not astonishing; not statistically far from zero or different from the market,” he says.
Still, shorts clearly seem more, well, fun to Hempton. They stir the regulator in him – his 1990s were mostly spent as a civil servant in Canberra working on countering tax avoidance – the swotty strategist (his lucrative post-Canberra years were with billionaire investor Kerr Neilson) and even the investigative journalist.
And it’s a reputation he seems to like fostering. His appearance on ‘Dirty money’ was calculated.
“That was fun, to prove that our methods worked,” he says. “If you are short some dodgy stock in the UK, that’s sort of interesting, but if you short a $100 billion company on Wall Street, and you are right before all the famous people, that proves that you know what you are doing.”
Hempton has a near cult following among hedgies and investors. One of his clients is Malcolm Turnbull, Australia’s former prime minister. Alex Hill, co-founder of Singapore-based Tantallon Capital Advisors, has been reading Hempton’s blog for years and laments never meeting him.
“I like his take,” says Hill. “He’s an alternate thinker, definitely outside of the box, and he tends to do his own research. Nor is he afraid to speak his mind or take on others bigger than him.”
He is also well followed at the national market regulator, the Australian Securities and Investments Commission (Asic). Says one of Asic’s senior lawyers: “Whenever John speaks, we listen. Bronte has a weight in the market that outweighs the money it invests.”
He’s an alternate thinker, definitely outside of the box... Nor is he afraid to speak his mind or take on others bigger than him - Alex Hill, Tantallon Capital Advisors
That Asic is grateful to Bronte stems from Hempton’s 2009 exposure of a $300 million fraud at what proved to be a fake Australian fund manager called Trio Capital. Hempton’s letter to the regulator about Trio opened with: “You should call the federal police – and if you don’t I will.”
“And they did,” he says. “I gave that to Asic as a charity job, as a good citizen. There was nothing in it for me. I made no money on that.”
A year earlier in a post headlined ‘Hookers that cost too much, flash German cars and insolvent banks,’ Hempton flagged a crisis in Baltic banking, a post that would prove prophetic.
“Regulators, even the best ones, are completely overwhelmed,” Hempton notes. “Their job is harder than mine. Mine is just the balance of probabilities, a reasonably articulable suspicion. Their burden of proof is miles high. Yes, they have subpoena power, but they don’t use it enough.”
Bureaucracy is another obstacle – and standards.
“There are 1,000 staff at Asic, and less than 50 I would even contemplate interviewing,” he says.
Still, Hempton has rules. He tends not to disclose his shorts, although sometimes his positions have been aired accidentally or outside his control, with consequences.
“I’ve had phone call threats – and I take them seriously,” he says.
“Don’t go public on companies in England because the defamation laws are horrible. Don’t short Chinese frauds from particular areas in the south of China. It’s a health risk,” he says. “Don’t publicly short any companies from the south of Italy whose directors have Sicilian surnames. If you short them, you certainly don’t want to tell anybody because it’s the horse’s head in the bed.”