Curated Insights 2019.05.10

Why you’ll never invest in the next big short

Greenblatt’s Gotham Capital funded Burry’s investment fund when he decided to quit medicine and become a full-time investor. They even took an ownership stake that was rewarded handsomely when Burry’s value investments performed well right out of the gate. But when Burry got interested in betting against the housing market in 2005-2006, Greenblatt, along with many other investors in the fund, balked.

Burry so believed in his bet against these terrible housing loans that he eventually put a gate on his fund. In hedge fund speak, this means he made it harder for his investors to withdraw capital. Greenblatt and company threatened to sue and it almost forced Burry to give up on his trade of a lifetime:

“If there was one moment I might have caved, that was it,” said Burry. “Joel was like a godfather to me—a partner in my firm, the guy that ‘discovered’ me and backed me before anyone outside my family did. I respected him and looked up to him.”

Of course, Burry was proven right. By June 2008 his fund was up nearly 500% from its inception in 2000 versus a gain of just 2% in the S&P in that time. He and his investors made out like bandits from his housing short. Greenblatt is a legend and he almost let one of the greatest trades ever made slip away because he didn’t understand it. But can you blame him?

In 2006, the S&P 500 was up more than 15% while Burry lost close to 20% because the housing market had yet to roll over. Burry was a tried and true value investor so betting against the housing market was an enormous style drift on his part. And gating your fund after a horrendous year isn’t a great signal to investors. If someone like Greenblatt nearly whiffed on the greatest trade of all-time, what chance would you have at seeing something like this through?

Burry sent an email in the fall of 2008 to some of his friends that read: “I’m selling off the positions tonight. I think I hit a breaking point. I haven’t eaten today, I’m not sleeping, I’m not talking with my kids, not talking with my wife, I’m broken.” It’s hard enough to make money when the markets are in upheaval but Burry was basically betting against the entire system here. You get the sense from reading Lewis’s book that, although they made a ton of money, the people who pulled this off didn’t delight in the situation even after being proven right. It exacted a toll on everyone involved.

To his founding investor, Gotham Capital, he shot off an unsolicited e-mail that said only, “You’re welcome.” He’d already decided to kick them out of the fund, and insist that they sell their stake in his business. When they asked him to suggest a price, he replied, “How about you keep the tens of millions you nearly prevented me from earning for you last year and we call it even?”

Larry Fink, Barclays and the deal of the decade

Mr Fink swooped. In March 2009, he began negotiating with Bob Diamond and John Varley, then president and chief executive of Barclays respectively. The $15.2bn cash-and-stock deal they announced in June transformed BlackRock into a financial services colossus and ultimately changed the shape of the global investment industry. Barclays, in turn, managed to avoid a government bailout but it has since been accused of selling its crown jewel.

In one stroke the purchase made BlackRock the world’s largest fund manager, with $2.8tn in assets. Ten years on, it oversees $6.5tn and has a market value of more than $74bn. More importantly, it ensured the company, which was then best known as an active fixed income manager, had a large foothold in part of the asset management industry known as passive investing. BGI, through its iShares brand, was a leader in exchange traded funds, where funds passively track an index of shares instead of making active bets on stock prices of different companies. Since 2009, assets managed in ETFs globally have ballooned from just over $1tn to a record $5.4tn.

Barclays secured a 19.9 per cent BlackRock stake as part of the BGI deal, which was valued at $13.5bn when announced but rose to $15.2bn when it completed six months after a 62 per cent surge in BlackRock shares. “Selling that stake in 2012 turned out to be a bad move,” said Mr Weight. The divergence in fortunes of the respective shareholders has been stark. BlackRock has outperformed Barclays by 470 per cent in common currency terms since the BGI deal. During the decade Barclays shares have dropped more than 40 per cent, while BlackRock is up 160 per cent.

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