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Hedge Fund Manager Chris Brown Gives Himself a ‘C’

Aristides Capital’s long-short funds are down around 4.5 percent this year.

Aristides Capital has managed to keep its losses in check as markets have plummeted — but founder Chris Brown is still kicking himself for not doing better. “If I had to grade my performance,” he said in a recent letter to investors, “it would be about a C.”

The firm’s hedge funds lost about 4.5 percent last month, putting them down around the same amount for the first nine months. “Across the board, it was a yucky, no good, terrible month,” Brown said.

Aristides has mostly outperformed the HFR equity hedge index, which was down 13.81 percent year-to-date and 4.24 percent in September. And of course the hedge fund firm is still way ahead of the broader market: The S&P 500 was down 9.2 percent in September and 23.9 percent through the first nine months.

But Brown thinks he should have been “paying attention to what is extreme and having the courage to act with conviction… a secret recipe for making money over the last few years.”

According to Brown, the much-criticized aphorism “this time is different” actually has been true in recent years.

In hindsight, Brown explained, “one needed to recognize that Covid was going to be, to borrow the words of Mr. Biden in a different health care context, ‘a big fucking deal.’” 

Although Aristides managed to take only a small hit in March of 2020, he said that “someone with conviction would have been long a ton of volatility index calls, and kept re-loading them even as the market stupidly melted up right into that February options expiration.”

Then, Brown argued, “one needed to promptly recognize the enormity of the unprecedented fiscal and monetary stimulus. We missed the boat here for about six months in 2020.”

The hedge fund manager said that Aristides “eventually got the message ‘Money printer go Brrr,’ in time for a great 2021.” When the Federal Reserve “suddenly changed its tune,” Brown added that the firm “managed to greatly cut our net exposure from large numbers to more like 45 to 50 percent.”  It wasn’t enough, he said.

Brown said he wants to be able to recognize “when there is a sudden change” and do “the things one needs to do to be successful when the moment of ‘sudden change’ has arrived.”

“If you look at our funds’ entire performance since the end of 2019, it is certainly not a ‘C’; something like a B+ to A- on the whole,” he acknowledged. “I am deliberately trying to manifest more awareness of macroeconomics in what we do; especially to be aware of those sudden change moments, and to take better advantage of them.”

He now thinks that the market won’t bounce back before companies begin to make “large negative earnings revisions.” 

“In the long-run, ‘Yay! Economic data is awful!’ is not a reason for stocks to be higher, especially not when the Fed has been briskly raising rates for months on end, almost certainly a harbinger of significant economic slowing/pain on the way,” he explained.

As a result, Aristides is only 25 percent net long “on a beta-adjusted basis” and Brown is tilting the long portfolio towards international microcap stocks. 

He’s still on a roll with his shorts and thinks some will fall another 90 percent, but he said he is reluctant to add to the positions because short squeezes and “social media pumps” could make it “very painful to bet against them.”

In September, Aristides’ biggest winners included shorts of Beyond Meat, Veru, and Gamestop. One of his biggest losers for the month was its short of Cassava Sciences. 

Year to date Aristides Fund is down 4.42 percent and Aristides Fund QP, its quant fund, is down 4.53 percent. In September they fell 4.57 percent and 4.44 percent, respectively. The funds are still up 15.48 percent annualized since inception in 2008. 

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