Berkowitz Responds to Einhorn

[Hielko]

Meh, Einhorn gained 53% on a 9 year investment. Not exactly something to write home about.

You should compare it against what a short position in the S&P500 would have done in the same period.

[Parsad]

Meh, Einhorn gained 53% on a 9 year investment. Not exactly something to write home about.

You should compare it against what a short position in the S&P500 would have done in the same period.

 

Why?  Last I checked, Einhorn reported his results based on absolute returns...an 8% return is an 8% return.  Cheers!

[gg]

Meh, Einhorn gained 53% on a 9 year investment. Not exactly something to write home about.

You should compare it against what a short position in the S&P500 would have done in the same period.

 

Why?  Last I checked, Einhorn reported his results based on absolute returns...an 8% return is an 8% return.  Cheers!

 

Probably not worth over-analyzing (after all, I don't want to take anyone's attention away from the VRX thread), but I think this sort of high single digit positive return like this on a short position is better than just the equivalent in a long position in some ways, because he was essentially paid that rate to borrow the money. That's less about Einhorn and more about the economics of shorting...Obviously Einhorn was exposed to different (and likely much greater) risks than a traditional loan, but he gets to put the short proceeds into long ideas, thereby providing his portfolio with leverage, so you could also look at this as if he borrowed money for 9 years, and was paid 8% per year to hold it.

[thepupil]

Mr. Parsad has an incredibly high standard when it comes to short selling. Even if tremendous alpha AND nicely positive absolute profits are generated , he will find fault with it.

 

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire. Very few have done that, particularly in recent years (if anyone knows anyone who has, please PM me because I have some money for them to manage). JOE (pre-borrow at least) was a home run for Greenlight and has certainly done better than the rest of their or anyone else's shorts.

See this thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/chanos-nice-interview/msg145678/#msg145678

[ERICOPOLY]

Meh, Einhorn gained 53% on a 9 year investment. Not exactly something to write home about.

You should compare it against what a short position in the S&P500 would have done in the same period.

 

Why?  Last I checked, Einhorn reported his results based on absolute returns...an 8% return is an 8% return.  Cheers!

 

Probably not worth over-analyzing (after all, I don't want to take anyone's attention away from the VRX thread), but I think this sort of high single digit positive return like this on a short position is better than just the equivalent in a long position in some ways, because he was essentially paid that rate to borrow the money.

 

It's pretty easy to get "paid" to borrow money in a long position...

 

You just write a put. 

 

You now effectively have a long position by shorting a synthetic hedged short position.

 

 

[Parsad]

Mr. Parsad has an incredibly high standard when it comes to short selling. Even if tremendous alpha AND nicely positive absolute profits are generated , he will find fault with it.

 

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire. Very few have done that, particularly in recent years (if anyone knows anyone who has, please PM me because I have some money for them to manage). JOE (pre-borrow at least) was a home run for Greenlight and has certainly done better than the rest of their or anyone else's shorts.

See this thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/chanos-nice-interview/msg145678/#msg145678

 

Again, you can make that argument for Chanos, as he has made his living primarily as a short manager, but not for Einhorn. 

 

That being said, compare Chanos numbers for the last five years against the S&P 500 and you will see the stupidity in paying a hedge fund manager to protect you on the downside. 

 

Cash worked in 2007/2008 and cash would have killed Chanos over the last five years if you were worried about downside risk.  Absolute returns over the long-run are all that matter if you plan on becoming wealthy!  Ask Ericopoly!  Cheers!

[thepupil]

Mr. Parsad has an incredibly high standard when it comes to short selling. Even if tremendous alpha AND nicely positive absolute profits are generated , he will find fault with it.

 

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire. Very few have done that, particularly in recent years (if anyone knows anyone who has, please PM me because I have some money for them to manage). JOE (pre-borrow at least) was a home run for Greenlight and has certainly done better than the rest of their or anyone else's shorts.

See this thread:

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/chanos-nice-interview/msg145678/#msg145678

 

Again, you can make that argument for Chanos, as he has made his living primarily as a short manager, but not for Einhorn. 

 

That being said, compare Chanos numbers for the last five years against the S&P 500 and you will see the stupidity in paying a hedge fund manager to protect you on the downside. 

 

Cash worked in 2007/2008 and cash would have killed Chanos over the last five years if you were worried about downside risk.  Absolute returns over the long-run are all that matter if you plan on becoming wealthy!  Ask Ericopoly!  Cheers!

 

Sorry, I don't understand. Are you saying Einhorn shouldn't short? He's built his spectacular track record on doing well on both sides of the book (though judging by his recent performance, short alpha has probably been close to 0 lately).

 

I agree that absolute returns are the most important thing to creating wealth. Very good short selling increases absolute returns. Very good short selling is difficult though and most hedge funds don't add much value on the short side and have too high of fees.

[ERICOPOLY]

Khloe Kardashian appears to have closed her short on her marriage with Lamar Odom.  She's going for the whole bag is my guess -- he might not recover from that night in a Nevada brothel. 

 

She's going for absolute returns.

[morningstar]

Absolute returns over the long-run are all that matter if you plan on becoming wealthy!  Ask Ericopoly!  Cheers!

 

That's true, but it's absolute portfolio returns that matter for wealth, not absolute returns on individual investment line items.

 

And risk matters too (especially when you are levered up), and shorts tend to reduce certain market risks in an obvious way.

[Parsad]

Absolute returns over the long-run are all that matter if you plan on becoming wealthy!  Ask Ericopoly!  Cheers!

 

That's true, but it's absolute portfolio returns that matter for wealth, not absolute returns on individual investment line items.

 

And risk matters too (especially when you are levered up), and shorts tend to reduce certain market risks in an obvious way.

 

Of course risk matters.  Do you think shorting is without risk?  You have limited upside with unlimited downside...how is an investment based on that mitigating risk in a portfolio?

 

This is the BS that those that short like to use to argue risk management.  There are a number of ways of managing risk without the limited upside and unlimited downside of shorting.  Cheers!

 

 

[Hielko]

Adding shorts to your portfolio usually decreases your risk because shorts are negatively correlated with long positions....

[Guest Grey512]

The more short names you have in your portfolio (especially if you size them too big), the greater the amount of "unknown unknowns" in your portfolio, risk-wise. If even a few of your shorts behave like TSLA in 2013 or Volkswagen in 2008, you are dead.

[AtlCDore]

Einhorn is a hedge fund manager with a lot of institutional investors.  Institutional investors want their hedge funds to have shorts and even though Einhorn is a superstar hedge fund manager, there is no way he is immune to the influences of the institutional money.  In reality, absolute returns is not their (institutions) #1 priority. 

 

The amount of time and effort for Einhorn to find short ideas is not worth it in absolute terms but makes sense given his investor base. 

[Hielko]

Einhorn is a hedge fund manager with a lot of institutional investors.  Institutional investors want their hedge funds to have shorts and even though Einhorn is a superstar hedge fund manager, there is no way he is immune to the influences of the institutional money.  In reality, absolute returns is not their (institutions) #1 priority. 

 

The amount of time and effort for Einhorn to find short ideas is not worth it in absolute terms but makes sense given his investor base.

lol, like you know whether or not finding shorts ideas is worth it for Einhorn.

[AtlCDore]

Einhorn is a hedge fund manager with a lot of institutional investors.  Institutional investors want their hedge funds to have shorts and even though Einhorn is a superstar hedge fund manager, there is no way he is immune to the influences of the institutional money.  In reality, absolute returns is not their (institutions) #1 priority. 

 

The amount of time and effort for Einhorn to find short ideas is not worth it in absolute terms but makes sense given his investor base.

lol, like you know whether or not finding shorts ideas is worth it for Einhorn.

 

You're right.  I don't know.  However given the amount of time Einhorn has probably spent with presentations, dealing with the media, writing a book in the case of ACAS; I would find it hard to believe that the gains he generated on these short positions per the number of hours he spent would have been better spent on finding long ideas.

[adesigar]

Meh, Einhorn gained 53% on a 9 year investment. Not exactly something to write home about.

You should compare it against what a short position in the S&P500 would have done in the same period.

 

Why?  Last I checked, Einhorn reported his results based on absolute returns...an 8% return is an 8% return.  Cheers!

 

Probably not worth over-analyzing (after all, I don't want to take anyone's attention away from the VRX thread), but I think this sort of high single digit positive return like this on a short position is better than just the equivalent in a long position in some ways, because he was essentially paid that rate to borrow the money. That's less about Einhorn and more about the economics of shorting...Obviously Einhorn was exposed to different (and likely much greater) risks than a traditional loan, but he gets to put the short proceeds into long ideas, thereby providing his portfolio with leverage, so you could also look at this as if he borrowed money for 9 years, and was paid 8% per year to hold it.

 

Really? He was paid 8% per year? Who are these amazing people lending him shares for 8 years at no cost?

[thepupil]

writing a book in the case of ACAS;

 

just to be clear, the book was about Allied Capital; ACAS is also a slimy DC based BDC but is still very much around.

[Parsad]

Adding shorts to your portfolio usually decreases your risk because shorts are negatively correlated with long positions....

 

A basket of shorts may decrease portfolio risk if they move opposite your long positions in a down market, but there is no guarantee any single short idea would...unless you are shorting an index ETF or similar.  Shorting Fairfax during the financial crisis would have been very costly.

 

My point goes back to paying someone like Chanos 1.5-2% a year to do what he does?  How has that worked for the last five and a half years? 

 

The institutional imperative and modern portfolio theory drive people to do things like short...especially if they wrap their balls in ungodly amounts of leverage.  Can you imagine what happens if that leverage begins to squeeze...thus stupid people, doing stupid things like shorting.  Cheers! 

[yitech]

St. Joe Company Settles With S.E.C. on Overvaluing Land Holdings

http://www.nytimes.com/2015/10/28/business/dealbook/st-joe-company-settles-with-sec-on-overvaluing-land-holdings.html

[rukawa]

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire.

 

I'd like to see that math. Making 20% a year it would take you 52 years to turn 100,000 into a billion. Making 8% a year it would take 121 year or so. Good luck!

[thepupil]

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire.

 

I'd like to see that math. Making 20% a year it would take you 52 years to turn 100,000 into a billion. Making 8% a year it would take 121 year or so. Good luck!

 

-you aren't including the returns from a long book. Very few hedge funds run with less than 100% gross (i.e. a short position does not crowd out a long position). So the rate of compounding would be much higher. build a spreadsheet. for any given time period, take the s&p, put in 100% long exposure and then add a 50% short book that makes 8% / year (you would obviously need to make it have some sort of negative correlation to the s&p to approach reality, but making 8% a year from shorting is certainly not anywhere close to recent reality so this is kind of a useless hypothetical). rebalance to 100%  by 50% monthly quarterly, whatever. the compounding will be very high and it will have lower drawdowns and vol, the track record would be great.

 

-you aren't including management fees and incentive fees, 8% / year from a decently diversified and scalable short book would make my fund incredibly attractive as a high return, high alpha strategy. If I couldn't raise money from institutions, I'd walk into Izzy Englander or Steve Cohen's office and be running a big book in no time.

 

-your starting value is too low  ;D

 

If you can make 8% a year shorting over the next 20 years, you'll be billionaire too. But it's not happening.

 

That's really really really really hard.

 

 

[Parsad]

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire.

 

I'd like to see that math. Making 20% a year it would take you 52 years to turn 100,000 into a billion. Making 8% a year it would take 121 year or so. Good luck!

 

-you aren't including the returns from a long book. Very few hedge funds run with less than 100% gross (i.e. a short position does not crowd out a long position). So the rate of compounding would be much higher. build a spreadsheet. for any given time period, take the s&p, put in 100% long exposure and then add a 50% short book that makes 8% / year (you would obviously need to make it have some sort of negative correlation to the s&p to approach reality, but making 8% a year from shorting is certainly not anywhere close to recent reality so this is kind of a useless hypothetical). rebalance to 100%  by 50% monthly quarterly, whatever. the compounding will be very high and it will have lower drawdowns and vol, the track record would be great.

 

-you aren't including management fees and incentive fees, 8% / year from a decently diversified and scalable short book would make my fund incredibly attractive as a high return, high alpha strategy. If I couldn't raise money from institutions, I'd walk into Izzy Englander or Steve Cohen's office and be running a big book in no time.

 

-you're starting value is too low  ;D

 

If you can make 8% a year shorting over the next 20 years, you'll be billionaire too. But it's not happening.

 

That's really really really really hard.

 

What was Einhorn's short book return from 2000 to 2015?  That's not quite 20 years, but would you not say pretty close to 20 years.  But Einhorn's already a billionaire, so he doesn't need 8% a year.

 

When you build an investment portfolio, you shouldn't be thinking about 15 decent long positions and 6-7 decent short positions, so that you can avoid drawdowns while maximizing exposure in the porftolio.  That along with the liberal use of the word "alpha" is modern portfolio bullshit! 

 

You should be looking for 8-10 of your absolutely best ideas...or less...and it shouldn't matter whether they are long or short.  That being said, remember that the downside to shorting is unlimited, while the upside is limited.  A great long position will always make you more money than a great short position.

 

If your primary concern when running a fund is drawdowns, then you probably should not be running a fund.  The primary concern should always be finding the best ideas you can and maximizing results for your partners with the least amount of permanent capital loss.  Cheers!

[thepupil]

I don't run a fund and don't short much. Rukawa just asked how making 8% a year on a short book would lead to one being a billionaire. I answered. Sorry if that was confusing.

 

 

[Gray Fox]

If I could make 8% a year consistently from a decently diverse short portfolio, I would be a billionaire.

 

I'd like to see that math. Making 20% a year it would take you 52 years to turn 100,000 into a billion. Making 8% a year it would take 121 year or so. Good luck!

 

-you aren't including the returns from a long book. Very few hedge funds run with less than 100% gross (i.e. a short position does not crowd out a long position). So the rate of compounding would be much higher. build a spreadsheet. for any given time period, take the s&p, put in 100% long exposure and then add a 50% short book that makes 8% / year (you would obviously need to make it have some sort of negative correlation to the s&p to approach reality, but making 8% a year from shorting is certainly not anywhere close to recent reality so this is kind of a useless hypothetical). rebalance to 100%  by 50% monthly quarterly, whatever. the compounding will be very high and it will have lower drawdowns and vol, the track record would be great.

 

-you aren't including management fees and incentive fees, 8% / year from a decently diversified and scalable short book would make my fund incredibly attractive as a high return, high alpha strategy. If I couldn't raise money from institutions, I'd walk into Izzy Englander or Steve Cohen's office and be running a big book in no time.

 

-you're starting value is too low  ;D

 

If you can make 8% a year shorting over the next 20 years, you'll be billionaire too. But it's not happening.

 

That's really really really really hard.

 

What was Einhorn's short book return from 2000 to 2015?  That's not quite 20 years, but would you not say pretty close to 20 years.  But Einhorn's already a billionaire, so he doesn't need 8% a year.

 

When you build an investment portfolio, you shouldn't be thinking about 15 decent long positions and 6-7 decent short positions, so that you can avoid drawdowns while maximizing exposure in the porftolio.  That along with the liberal use of the word "alpha" is modern portfolio bullshit! 

 

You should be looking for 8-10 of your absolutely best ideas...or less...and it shouldn't matter whether they are long or short.  That being said, remember that the downside to shorting is unlimited, while the upside is limited.  A great long position will always make you more money than a great short position.

 

If your primary concern when running a fund is drawdowns, then you probably should not be running a fund.  The primary concern should always be finding the best ideas you can and maximizing results for your partners with the least amount of permanent capital loss.  Cheers!

 

Running an institutional long/short fund is very different than running a concentrated investment partnership.  Institutional money doesn't like volatility.  Institutional money pays 1.5/20 for a return that is largely uncorrelated to the market.  Whether or not that is the right way to do things is debatable, but it is reality.  I personally believe that having a concentrated portfolio of 8-10 high conviction ideas is the best way to generate high absolute returns.  I don't have to allocate billions for an endowment or pension fund to different managers though.

 

Most of the time big multi-manager shops require their PMs to run market neutral.  P72/Millenium/Citadel/etc have gross exposure that is multiples of of their actual capital.  If you run a $500mm book for them you are getting 20% of the PnL which sounds amazing, but all of the PnL has to be generated on a spread between a long and a short book.  And the characteristics of the short book have to be relatively similar to your long book.  You can't be long a bunch of hospitals and short a bunch of oil stocks. 

 

A short book that can do 8% absolute annualized returns in a normalized equity environment (6-8% returns) would be absolutely incredible.  Zero alpha on the long side would still result in a 15 percentage point difference in longs vs. shorts.  A market neutral fund with these characteristics would be a star in house at any big multi-manager or could go raise a lot of money on its own.  It absolutely would be a solid ticket to being a billionaire. 

 

It may not be the best way to generate the highest overall returns, but people will pay out the wazoo for that kind of short book.  If you go to an allocator and say "I run a concentrated value with a catalyst fund that looks for special situations" there are hundreds, if not thousands of other alternatives.  If you can tell an allocator "I'm market neutral and have a 5 year track record of 15% returns" the money will break down your door.

[Gray Fox]

I apologize for furthering the tangent away from JOE, but here is an example of L/S vs. a concentrated best ideas type fund.

 

SEQUX has a 40 year track record, a great research staff, and puts money into the very best ideas.  They get a 1% flat fee. This is one of the most respected research-intensive funds in the world.  RCG has AUM roughly 3x Sequoia and I don't know what they fee on their SMA business (or even if its long only), so caveat emptor.

 

Contrast this with all of the Tiger funds that run high gross, low-medium net exposure funds that get 2/20.  Mandel, Halvorsen, Ainslie etc are all billionaires because they add alpha on the long and the short side.