thepupil

Eric, I explored doing that with the expensive BAC Warrants, but the cost of borrow was prohibitive, indicating many already are shorting the warrants.

Trying hard not to be an ass here, but can we agree that the Chanos added value? Even after fees. Play around with the spreadsheet for a bit. If you were given the choice in 1985 to invest in 100% SPY, or add some Ursus Partners to the mix. You would have made more money if you added Ursus up to around 130% allocation, after which the short bias kills you, and before which drawdowns/volatility are intolerable because of too much gross exposure. 0-50% is quite reasonable though. A typical long short fund runs 40-80% net, so it's not like this is some unrealistic hypothetical. At 50% allocation to Chanos, you end up with 40% more in NAV and your lowest yearly return was 12.3% (inputs: 100% SPY, 50% Chanos, 0% withdrawal, result: 1398 vs 1047 for 100% SPY). In your worst year you would've lost 12.3% and you wouldve lost a touch more than that 2001-2003. The losses are far worse for 100% SPY or a levered SPY (of course you make more money being levered SPY) When viewed in isolation, Ursus, lost 25% of it's value over the time period after fees. But no one invests in short only funds in isolation. It's not only about smoothing returns and reducing drawdowns, it's also about making more money. This is not intuitive. How can a fund with a negative expected value strategy (shorting) and one that produced negative after fee returns, help out a portfolio? How can adding gross exposure (levering) to a negative return strategy increase returns? The answer lies in the fact that Chanos generated very real alpha via negatively correlated gains. It muted drawdowns and preserved capital, which allowed for increased participation in the general upswing of the market. You can dismiss this as academic finance mumbo jumbo worthy of a 200 grand worthless MBA, but I don't think those lucky enough to have invested in this fund at the outset would agree with you; they are better off in dollar terms for having made the decision to invest. The question of leverage and capital usage is an obvious hole in my argument, as is the increased tail risk of shorting (A Volkswagen even blowing you up) as is the real world challenge of rebalancing amongst long funds and short (my model assumes a kind of perfectly constant net exposure, which is not realistic) But think about it on the fund level. If a fund can find a Chanos that can smooth returns, and make more money, why on earth would it not hire him? the problem is not with Chanos, it is that there are not enough Chanos's. this type of track record is RARE and to be envied and arguably not replicable.

even after putting in a -20% allocation to cash in the 100% SPY, 20% Chanos scenario to account for the fact that most people would have to commit capital to chanos to get access to his return, the ending NAV and average NAV are higher. The returns are more "robust" and are arguably more likely to sustain the institution and less likely to experience permanent impairment. There are some problems with the simulation (it assumes constant exposure to each and rebalancing), of course, and thinking about asset allocation this way may seem foreign or stupid or make you gag. But to completely dismiss it, is wrong in my opinion. To think alpha is dumb or that no short sellers and hedge funds add value is, in my opinion, close-minded. Short selling alpha is hard to find and valuable; I probably haven't convinced any unbelievers though.

To illustrate the utility of Chanos returns, I've built a very crude model where one can input allocations to Chanos (with net returns and no high watermark), cash, and SPY. This relates to my job but I don't have time to proofread or improve this, so feedback is appreciated. You can draw your own conclusions. For me, the numbers are compelling. One ends up better off by including Chanos's fund in the picture. If i have erred in my assumptions or building the spreadsheet, let me know. I included 120% SPY, -20% cash , which is the best result because some would see 100% SPY 20% Chanos as utilizing leverage rather than reducing market risk. There will be no end to this debate. But I hope this is helpful. Ursus.xlsx

So, this is all about being a better lemming? Twenty years is a long time for everyone to be wrong because they all read the wrong book and now we want to add to the wrong book collection. Swell! No, it's not about being a better lemming. It's about not being a lemming and thinking for oneself about the very interesting potential of someone who can consistently identify stocks that materially underperform the market, about the potential of someone that can provide capital (either within a fund, or if done through a separate account platform, within a portfolio of other managers) at a negative cost. Am I the lemming? Or are you? Am I seriously the only one here impressed by that track record and think that it has some function, that finding 10 Chanos's would be a worthwhile activity?

This is not necessarily true, because of rebalancing. The performance of a combined performance that is rebalanced periodically can exceed the performance of the individual components. e.g. Suppose that you have two investments, and you put $100 in each. Investment A falls 50%. Investment B goes up 50%. You'd still have $200. Supposed you then rebalance, putting $100 in to A, and $100 into B. If A then doubles, and B falls 33%, then both investments are back where they started. Someone who had just bought and held each investment would have a 0% return. However, because of the rebalancing, your investment in A is now worth $200, and your investment in B is now worth $66. Your return of 33% is better than either investment A or investment B. Thank you Richard! That's part of my point. I said I wouldn't continue arguing but I can't resist. It really bothers me when someone's excellent track record is dismissed out of context. A 20 year track record, like that is an accomplishment deserving of respect. Saying Chanos adds no value is like saying Ajit Jain or Berkshire's insurance operations add no value because they don't make a high absolute returns when viewed in isolation. The insurance operations provide capital at a negative cost to Berkshire, just like a short book that can squeeze out positive absolute returns and high alpha provides capital to a portfolio or a hedge fund. I am not arguing that short selling in aggregate is not a negative return proposition. It absolutely is! Thankfully, the long term trend in prosperity and corporate profits is constantly providing a headwind to shortsellers. But the idea that Chanos returns are not spectacular ignores the potential of combining that return stream and the capital it provides with more lucrative activities. Remember, short selling provides cash, rather than consumes it. If you put 100% of your money into SPY (better yet, 100% in managers that can outperform on the long side) and some percentage allocation to Chanos and his fellow short sellers, you'd be better off in terms of volatility AND $ actual money made because Chanos eked out a positive return. This is true even ignoring the potential for "strategic" or "tactical" rebalancing based on market valuations, mean reversion, or whatever. I'm sure I'll get hated on for that last one, or maybe compared to Whitney Tilson, or make Parsad gag again : ) Now the argument can be made that you are taking on more risk by running gross exposure over 100%, or that short selling is an inferior form of leverage because of its strange risks (forced buy-ins, squeezes, recourse, Volkswagen October 2008, etc. ), or that you shouldn't care about volatility, or that finding the Chanos's of the world is incredibly difficult (it is!) or that cash is an asset class and a better hedge for those who care about volatility. But those arguments are beyond the scope of the questions at hand, which in my view are 1) is chanos a good short seller? 2) does he provide value to those who hired him? No evidence has been provided to refute the fact that Chanos made money when the passive alternative lost 900%. No evidence has been provided that Chanos returns are not spectacular when compared to hedge funds' short books or other dedicated shortsellers. I'm not saying people should be satisfied with 2% annualized or that one should put an undue amount of capital in a very low-return strategy. But to me it is indisputable that Chanos has done an amazing job.

I'm all for an absolute return orientation, but I think expecting someone's short book to underperform the market so dramatically may be unrealistic. How good of a stock picker would he have to be to have put up 8% per annum in that time period? Fairholme made 14% more than the market for a decade and was deemed mutual fund of the decade. Chanos beat the inverse market by 14% for two decades (I'm ignoring the returns from cash which I should include in benchmarking chanos which makes his performance less impressive; I'm also ignoring some mathematical issues with comparing the two) Maybe someone has done it, but do you know of any dedicated short sellers who have posted compelling long term absolute returns? Maybe Einhorn's short part of his book in his early days? I remember in the allied capital presentation he talks about greenlights' shorts doing very well over time It's tough to make any real arguments here without more info about how exactly the fund was run. I maintain that chanos did an amazing job if he was 100% short in that fund and that he is in the top 1% of short sellers based upon that record. But I'm just repeating myself and belaboring the same points so I'm moving on. It's a debate that can't be won and I like this board way too much to keep arguing with the big kahuna himself!

And the reason you would've paid Chanos do "what swaps and other cheaper products could achieve" is because the index multiplied by 10X. If you were short index via swaps or other products, you would have lost 9X your money instead of basically coming out flat after fees. There is huge value creation here relative to the passive alternative. In 1985 if I decided I wanted to short $100 of SPX, I'd have lost $900 over 20 years. If I decided I wanted to put on short exposure via Chanos' fund, I'd have made $50 and then paid 1+20 off that (I'm not going to do the math, but I can say with a reasonable amount of certainty that the net returns are better than -$900). I don't really like the whole reduce vol, increase diversification, diversify among securities and asset classes and blah blah blah corporate finance mumbo jumbo thing myself, but how can you not be impressed by Chanos returns and feel that he did not add value.

So basically you don't think anyone should ever engage in short selling because it is a low return proposition over long periods of time? That is a very fair belief and I won't argue against it. It is not fair to say that Chanos did not add any value when he produced a return of 2% and the index did 12.7% over a period of 20 years! I'm assuming he is short only because the paper says those results are for a short only fund. Your argument is one that should be had with asset allocators. But you can't present amazing results and say the guy adds no value. If a long only made 0% in Japan when the index lost a huge amount of money over a long period of time, wouldn't we all be praising him?

"his negative correlation stuff has no value any longer with swaps, bear ETF's, etc. Chanos adds no value to his clients on a long-term perspective and his whole existence survives on his client's fears" the S+P multiplied by 10X over the course of this presented track record. Chanos preserved capital and made 2% (50% cumulative). How is that not value added and indicative of great skill (or luck) in his field? I think the track record is for a short only fund "Ursus Partners". The strategy says "equity short" and they refer to "short only". Kynikos may take long position and be a long/short fund, but based upon this paper it looks like the track record is for short only. I know nothing about Chanos and cannot confirm any of the above, but just based upon how i read it, i'm very surprised and impressed.

I was being serious. Take off your warren buffett hat and put on your institutional investor (pension, foundation, endowment) hat for a short bit. By no means do i worship at the altar of academic finance, but the reality is that overall portfolio volatility does matter to institutions and for good reason; they have annual withdrawals in order to support their liabilities and therefore, to a certain extent, market value (not just intrinsic value) does matter, because market value is crystallized by liquidations in order to support spending. They also have lots of illiquid investments (venture capital, real estate, private equity etc) that cannot be called upon in a time of need. If you think volatility matters at all, then adding a short seller that can produce positive absolute returns (even if low) and high alpha will reduce your portfolios overall volatility without having an undue impact on your long term absolute returns. If you are totally and completely immune to market value fluctuations, then the argument can be made that even high alpha shorting is not a good use of one's capital. Some institutions are shifting more and more to long only. Many hedge funds are launching long only products. Whether or not shorting, as a strategy is worthy of one's capital is more of a philosophical debate/portfolio management debate and dependent on your mandate. Based upon the evidence presented in the attached pdf, Chanos is VERY good at what he does and adds a lot of value. If you just shorted the index you would've lost a lot more money than you would've entrusting it to chanos. It's another debate as to whether or not you'd be better off just holding cash and investing less. But institutions hire chanos to make money and to make money when the rest of their portfolio goes down. And he appears to have done that in the time period presented, and done very well at that.

Am i reading it correctly that he made 2% before fees being short only while the S+P compounded at 12.7%? If so, those are spectacular results and his reputation and attention are deserved. Whether or not you believe in dedicating capital to a strategy with a low to 0% absolute returns is more of a philosophical debate between asset allocators. But the PDF you posted shows adept short selling skill. Does it not?

Agreed, I was just saying that Berkshire has a hugely liquid short duration portion of its book and even in the absolutely impossible (would take nuclear war in which case who cares about our PAs) scenario in which it all came due, Berkshire could handle it.

1. There is a reason Berkshire keeps the float's value in cash and short term fixed income. Berkshire's estimated insurance liability is 70B or so. If that all came due tomorrow, Berkshire could handle it. 2. There is a reason Berkshire invests in operating businesses whose stable pretax income can be called upon to buttress the castle should it be assaulted by an insurance loss storm. 3. Anything can happen. I am comfy with 25% in berkshire (got up to 40% but not as cheap anymore), not 100%. 4. Hedging is cheap. Buy way OTM long term puts and sleep well at night if the gloom and doom gigantic catastrophe event scares you. Berkshire makes money selling tail insurance to others; if you are worried about the tail, buy some protection yourself!

just realized that is michael burry...nevermind

my only advice would be to not express your concerns in a non-anonymous way with a picture of you as your icon thing on a popular investing message board. it's a small world.

if duration is what you seek, any reason not to buy the same amount of duration in long bonds? instead of a X% in 10 yr's why not 0.3X% in 30 year zero's or long bonds? since this is likely to be a low return/money loser part of your portfolio (the base case calls for inflation above 0%), I would suggest packing more duration into a smaller % of the portfolio

http://www.guidestar.org/ReportOrganization.aspx?ein=04-3017940#annual unfortunately, no investment schedules here...sometimes you can find what foundations hold from their 990's

For cash that you don't need w/i 1 year and up to 10K/year: I savings bonds they pay you the official inflation rate and are redeemable after 1 year (though you lose some 3 months interest if redeemed before 5 years). The interest is taxable as income but deferred until redemption. these are basically enhanced cash/very low duration low risk fixed income http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds.htm For truly liquid, need it now cash: GE, Amex, Capital One and other online savigns accounts that pay you 0.75% or more for FDIC insured money. I would recommend a liquidity buffer of GE/Amex high yield savings accounts and then start to build a trove of i savings bonds. after 1 year they become liquid, inflation indexed, enhanced cash. over time your 100% of your emergency fund can be inflation indexed and tax deferred and is a direct obligation of the treasury rather than a bank's liability (though if we get to the point where FDIC is threatened the dollar probably won't mean much anyways and you'll want gold under the mattress)

Siddarth, IB has two stock lending programs. 1. Stock Yield Enhancement, which is managed by IB and automatically lends out your shares that it can do so profitably; they pass on some of this to you. 2. Stock Borrow /Loan is a self directed program where you transact directly with borrowers. For example, I own SHLD and I can see that the last rate agreed upon was about 14%. I go on to stock borrow loan and enter in a lend rate that I'm willing to lend shares; there is a bid and ask like a normal stock except far less liquid and not really transparent. I lend my SHLD at slightly below market rates because I don't want to keep having to re rate when my shares get returned to me if the. Market rate falls below where I am lending them ( also IB charges a $5 ticket fee for every trade, so I'd rather just get a less than optimal rate for my shares and transact seldom) I presume that you are signed up for the stock yield enhancement one and are simply not being paid the full rate by IB or their estimate of borrow costs could be wrong. If you don't want to direct your own securities lending I would suggest putting on a synthetic long via options market ( which should capture the cost to borrow)

A more reasonable argument would talk about how by buying Berkshire at current multiples of book and tangible book, you are, in part, buying KO, WFC, IBM, AXP, cash and short term fixed income at way above market levels Of course the whole 0% cost of float, deferred tax liability never to be realized, and acquisition pipeline ( what other company can take out Heinz using less than a years FCF) thing negate a lot of the premium you pay for easily replicable exposures, but I think that is the best reason to not buy.

Sahm publishes intensively researched writeups, was one of the loudest critics of Chinese reverse mergers, and seems to focus on smallcaps where he can get a real informational edge. He acknowledged that there may be monetary benefits to being a bit obnoxious. I agree with him. Maybe he is a one-hit wonder, maybe he is getting ahead of himself with his lavish spending, but I struggle to see how this guy is a joke. His posts on Seeking Alpha, VIC, and his own website are always of high quality. What's wrong with sharing ideas? Isn't that what we do here?

GLUX - Great Lakes Aviation VIC and OTC adventures were the sources of the idea. http://otcadventures.com/?p=495 http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/97245 38MM of tangible equity, comprised of relatively liquid assets (current assets and planes) against a 10.5MM market cap. Priced for bankruptcy and maybe that happens. I just see it as a never expiring option that pays 3-4:1 in the event they start making money again, pay down their somewhat usurious financing and the EAS program doesn't get axed. Only a 2% position because of the risks but I like the risk/reward.

"I buy into a bond fund in the hope it can hold nav so that in the market panic I can switch to some fat equity opps. " I think one should consider this a "fat-equity opp" with equity-like downside, not insurance by any means. Also they lost a bunch in 2008 because they had an effective margin call (see below). They probably had to reduce leverage because of '40 act restrictions on leverage for CEFs and the like. From Morningstar This highly leveraged municipal fund is high-risk, high-reward. The fund typically generates its high distribution by venturing down the credit spectrum into nonrated and junk-rated muni debt, focusing on the intermediate and long portions of the yield curve, and by leveraging its holdings. Compared with other leveraged municipal funds the fund is taking on more credit risk. Though its interest-rate risk is high, it is about average for the peer group. This strategy has worked well in recent years but has not held up in down markets such as in 2008. Both sister funds, which have identical strategies but were forced to deleverage, hover around the bottom of the peer group over the trailing five-year period. The addition of star municipal manager Joe Deane means that investors are likely in good hands, though he has not significantly departed from this strategy since joining PIMCO’s muni team. Because of these factors, the fund gets a Morningstar Analyst Rating of Neutral.

These are interesting because of their favorable leverage. A lot of them use auction rate securities, a market that is permanently broken and are paying close to nothing and likely will be for some time. It seems like a more intelligent way to load up on duration than mREITs which are much more levered and dependent on short term repo and own negatively convex securities. But you still are loading up on duration, for better or worse, and also bearing more credit risk than an agency mREIT (and probably most hybrid mREITs). I think they are interesting too though. From PMF's website: <1 Year 6.00 5-10 Years 30.00 10-20 Years 33.00 20+ Years 31.00 Effective Maturity (yrs.) 15.52 Effective Duration (yrs.) 9.43 http://seekingalpha.com/article/1552562-hidden-treasure-in-this-7-tax-free-yield-play http://seekingalpha.com/article/932061-the-not-so-obvious-reason-why-pimco-cefs-trade-at-a-premium