Scion Capital’s Wild Ride

Getting short subprime securities at the end of last year made billions for the likes of Paulson Capital.  Of course the Paulson crew was not the only hedge fund to recognize these opportunities. Michael Burry of Scion Capital also recognized thepending disaster:

“The opportunity in 2005 and 2006 to short subprime mortgages was an historic one,” Burry wrote in a letter to investors. “With continued hard work and a bit of luck, we will latch onto another opportunity like the subprime short. But I am not counting on it happening anytime soon.” Winterman

But timing is everything, and Scion was a little early in entering the short, which led to some of the funds investors pulling out late in 2006 as losses piled up::

Scion’s global strategy funds, the firm’s main investment portfolio, lost more than 16%. Burry had placed an early bet that the credit markets would deteriorate, but his strategy was too early in the view of some of his investors, and he was forced to withdraw their money well before the subprime debacle took shape....."The pain was certainly intolerable for some of our investors, and some that were very close to me capitulated at the very bottom,” Burry recalled.

Scion was a little early in covering the short, but has pulled in quite a haul:

....unwinding the positions from July through October the bet has so far generated four times the original value of the trade giving investors between 78% and 85% gains in the first nine months of the year. Since their inception in late 2000, the funds have surged more than 300%. During that time, the Standard & Poor’s 500 Index gained less than 10%.

Scion’s numbers are certainly off the charts, and now the hard work begins. Resetting investors expectations after a heady period is not easy. By the year 2000 Main Street was banking on 20% annualized returns in perpetuity. But it did not quite work our that way.

We tip our hat to the folks at Scion. The rest of you who have locked in a memorable year might want to get work on the clients lest they extrapolate these types of returns.

Every Cloud
Winterman Asset Manager

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