Michael Burry: will The Big Short movie have a real-life sequel?
Michael Burry has recently sold down nearly all of his hedge fund’s long positions.
While there are many memorable highlights from the film The Big Short, one of the best was Christian Bale’s depiction of Dr Michael Burry, one of very few hedge fund operators who made a fortune by betting against the subprime mortgage market.
Listening to heavy metal music and with his one-sighted eye doing everything possible not to draw contact with another, it was a great performance about a guy who survived a revolt by some of his own investors who wanted their money back before eventually rewarding them with a 489.34% return (net of fees) in less than eight years.
Arguably, Dr Burry’s best achievement was convincing big investment banks to sell credit default swaps on mortgage-backed bonds to him back in 2005 before the big crash of 2008.
Big bank greed the key to Dr Burry’s big shorts
Such was the hubris of the big banks and their lack of understanding of the risks within their bonds that they treated Dr Burry like a foolish patsy as he built up massive bets against their collateralised debt obligations.
Dr Burry has never really gone away since then, although he has taken his business interests private before returning to reform and run Scion and is famously bearish, but his latest action in selling out of virtually all of his hedge fund’s long positions is creating some real waves.
Never one to do things by halves when he thinks the numbers are telling him something, the only long position his Scion Asset Management had as of a regulatory filing from 30 June is of private-prison operator Geo Group Inc, which has seen its share price rise nicely.
Technology stocks sold but is there a big new short?
Big holdings in technology companies such as Google owner Alphabet Inc and Facebook parent Meta Platforms, Apple and pharmaceutical giant Bristol-Myers Squibb have been all been unceremoniously sold, which leaves plenty of mystery around what Scion might be shorting on the other side of the ledger with all of that freed up cash – something that hedge funds are not obliged to report.
Dr Burry has had some wins and losses since restarting Scion with his most memorable recent win being a prediction that cryptocurrencies would fall hard and an early prediction that US stocks were primed to fall.
Dr Burry not always right but has some recent form
In March 2021, Dr Burry described Bitcoin as a “speculative bubble that poses more risk than opportunity,” as he predicted a crash would soon unfold, which came true when Bitcoin crunched from US$59,000 in March to around US$34,000 by the end of May.
More recently, Dr Burry said the 18% gain in the tech-heavy Nasdaq Composite Index since the start of the third quarter is likely to reverse, with a cryptic post saying: “Can’t shake that silly pre-Enron, pre-9/11, pre-WorldCom feeling.”
That was seen as a reference to the tech wreck, which saw repeated rallies in technology stocks, as part of a long-term fall that erased 78% by the time the index hit bottom in 2002.
This time around, Dr Burry is unlikely to face much of an investor revolt but as always, predicting market falls is a tough ask and even if the bear is right, they need to hold on long enough to be proved right.
As top economist Gary Shilling once said, “markets can remain irrational a lot longer than you and I can remain solvent.”
Interestingly, that same quote is also attributed a little later to famous economist John Maynard Keynes, which perhaps shows that great minds do think alike.