Chanos Nice Interview

[indythinker85]

http://blogs.reuters.com/unstructuredfinance/2013/12/09/jim-chanos-bad-news-bear-urges-market-prudence/

[Parsad]

Chanos:  “I think hedge fund fees are probably still in a bubble although I would point out that the reality is that the days of 2-20 are kind of well behind us and even a lot of shops that charge that effectively make a lot less.

 

Isn't Kynikos 2 & 20 last I remember?  What value has this guy provided his investors over 30 years?  Cheers!

[gg]

I believe he actually has a formula that pays on alpha. I don't know the exact specifics, but I imagine as a short-biased fund, alpha is considered something similar to performance that beats the inverse of the S&P 500's performance.

[Parsad]

Sorry, he was 1 & 20...not sure what he is now...see attached PDF.  This 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.  Like Abbey Joseph Cohen, David Rosenberg, et al, he's built a reputation on a couple of hits and his media presence.  Long-term, he provides no value whatsoever and has been wrong far more than he's ever been right about markets!  Cheers!

Chanos_-_Performance.pdf

[thepupil]

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?

[indythinker85]

Sorry, he was 1 & 20...not sure what he is now...see attached PDF.  This 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.  Like Abbey Joseph Cohen, David Rosenberg, et al, he's built a reputation on a couple of hits and his media presence.  Long-term, he provides no value whatsoever and has been wrong far more than he's ever been right about markets!  Cheers!

 

LOL very blunt. I have heard his LT performance is very poor from several knowledge people, but I never saw any performance stats. Very nice thanks Parsad, do you by any chance have something more recent from the firm?

 

Cheers!

[BG2008]

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?

 

I couldn't tell if you were being serious or sarcastic.  I'd like to fully understand why the 2% absolute return is valuable to an investor.  Why not buy short duration treasury rates?  I'm genuinely trying to see the value that Chanos provides. 

[thepupil]

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.

[plato1976]

having value or not, this performance is actually quite amazing for a short only fund;

however, as far as I know chanos is not short only - sometimes he uses a few longs to "hedge" his short, so that if he's really short only his perf should be worse I guess. But I agree it's not a terrible perf and shows that he does have some skills

 

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?

[thepupil]

"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.

 

[ERICOPOLY]

I just know that his house sitter isn't famous for sitting houses, but that's what he says she does for him.  Glad he is providing her with honest work.

 

[Parsad]

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?

 

You are talking like any modern MBA or portfolio theory student.  I hear the word "alpha" and I gag!  Why would you need to pay someone 1 & 20 to do what swaps or other cheaper products could achieve?  And that +2% is over years relative to the S&P 500.  Any wonder why pension funds and endowments are so mismanaged...because of their short-term concern for "alpha", while paying idiots like Chanos a fortune.  Your argument was identical to the one Whitney Tilson used when I originally posted that years ago.  Cheers!

[fareastwarriors]

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?

 

You are talking like any modern MBA or portfolio theory student.  I hear the word "alpha" and I gag!  Why would you need to pay someone 1 & 20 to do what swaps or other cheaper products could achieve?  And that +2% is over years relative to the S&P 500.  Any wonder why pension funds and endowments are so mismanaged...because of their short-term concern for "alpha", while paying idiots like Chanos a fortune.  Your argument was identical to the one Whitney Tilson used when I originally posted that years ago.  Cheers!

 

It might be unfortunate but trillions of dollars are managed this way...  :-\

[thepupil]

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? 

 

 

 

 

 

 

 

 

 

[indythinker85]

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?

 

You are talking like any modern MBA or portfolio theory student.  I hear the word "alpha" and I gag!  Why would you need to pay someone 1 & 20 to do what swaps or other cheaper products could achieve?  And that +2% is over years relative to the S&P 500.  Any wonder why pension funds and endowments are so mismanaged...because of their short-term concern for "alpha", while paying idiots like Chanos a fortune.  Your argument was identical to the one Whitney Tilson used when I originally posted that years ago.  Cheers!

 

I hear both sides of the argument but agree more with Parsad; long term alpha does not matter. You cannot buy things with alpha, but this gets into a whole different argument absolute vs relative, what is risk etc. All I can say is LOL especially re Tilson.

[thepupil]

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.

 

 

[benhacker]

Why would you need to pay someone 1 & 20 to do what swaps or other cheaper products could achieve?

 

Come on Sanj,

 

So you know of a swap / short product that can provide me with way to make big returns during market downturns, over over time can still deliver me a money market like average performance?  Really?  I'm intrigued. LOL...

 

Let's not let our "love" for Chanos get in the way of the obvious fact that a short-only fund (understand that maybe Chanos isn't 100% short only) should be benchmarked like this:

 

negative [market return] + short term cash return - cost to borrow index.

 

Over Chanos' tenure, his "benchmark" is probably -8-10% annual.

 

Now we can all say that this is not a benchmark we would ever invest in, and indeed, most people don't short for the sake of shorting, but they short to take the extra cash / liquidity offered so they can then invest more aggressively.  Let's seperate benchmarks from those who choose to invest in them... Chanos has exceeded his benchmark while investing within its rules far more than most of us here could likely do.... Just as thePupil said. 

 

Now I agree, there is a real issue with counting on shorting to reduce your volatility in a way that is reliable (and yes, reduced volatility is obviously important for anyone taking withdrawals...)... Chanos' returns have not really been 1:1 inversely correlated to the market which creates a problem when you are actually seriously thinking about using shorting to gain more than 100% exposure to something else or otherwise leveraging risks assets... sometimes both sides of a pair trade can go wrong (ask Fairfax) and even if that only happens rarely, it is a real issue for how we define risk if and when it does happen...

 

Ben

 

PS - I'm getting too old... I think this is the second time in 5-6 years I've posted basically this same post on this same forum... ;-)

[Parsad]

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.

 

No, on the contrary Pupil.  I think if someone is short-selling, they should be able to selectively do better than 2% annualized, just like longs can do better than 2%.  I'm saying that Chanos is doing a shitty job! 

 

Chanos sells his fund to institutions, telling them that from an asset allocation standpoint, we can provide you net 2% annualized returns even when markets are tanking or going up.  So institutions to offset their long positions, will allocate a portion of their capital to Kynikos.  It's just stupid!  Cheers!

 

[Parsad]

Why would you need to pay someone 1 & 20 to do what swaps or other cheaper products could achieve?

 

Come on Sanj,

 

So you know of a swap / short product that can provide me with way to make big returns during market downturns, over over time can still deliver me a money market like average performance?  Really?  I'm intrigued. LOL...

 

Let's not let our "love" for Chanos get in the way of the obvious fact that a short-only fund (understand that maybe Chanos isn't 100% short only) should be benchmarked like this:

 

negative [market return] + short term cash return - cost to borrow index.

 

Over Chanos' tenure, his "benchmark" is probably -8-10% annual.

 

Now we can all say that this is not a benchmark we would ever invest in, and indeed, most people don't short for the sake of shorting, but they short to take the extra cash / liquidity offered so they can then invest more aggressively.  Let's seperate benchmarks from those who choose to invest in them... Chanos has exceeded his benchmark while investing within its rules far more than most of us here could likely do.... Just as thePupil said. 

 

Now I agree, there is a real issue with counting on shorting to reduce your volatility in a way that is reliable (and yes, reduced volatility is obviously important for anyone taking withdrawals...)... Chanos' returns have not really been 1:1 inversely correlated to the market which creates a problem when you are actually seriously thinking about using shorting to gain more than 100% exposure to something else or otherwise leveraging risks assets... sometimes both sides of a pair trade can go wrong (ask Fairfax) and even if that only happens rarely, it is a real issue for how we define risk if and when it does happen...

 

Ben

 

PS - I'm getting too old... I think this is the second time in 5-6 years I've posted basically this same post on this same forum... ;-)

 

I don't disagree with you Ben, but this is the institutional mentality that drives such behavior.  Fairfax is as culpable as anyone else recently...they hedged because they were levered...if they weren't so levered, no need for 100% hedges.  It's gone completely against them for four, nearly five, years.  This thought process leads to such behavior, and Chanos' reputation just perversely perpetuates such institutional mentality.  Cheers!

[thepupil]

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.

 

No, on the contrary Pupil.  I think if someone is short-selling, they should be able to selectively do better than 2% annualized, just like longs can do better than 2%.  I'm saying that Chanos is doing a shitty job! 

 

Chanos sells his fund to institutions, telling them that from an asset allocation standpoint, we can provide you net 2% annualized returns even when markets are tanking or going up.  So institutions to offset their long positions, will allocate a portion of their capital to Kynikos.  It's just stupid!  Cheers!

 

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!

[Packer16]

Long-term short selling only is like investing in phone directory firms or paging firms.  You may be able to do better than the decline rates they experience due to changes in valuation but LT your performance will follow the economics - down.  How would you rate a paging or phone directory investor?  I would compare him to the other alternatives (the S&P 500) and he would do poorly but may do well if I compare him to paging or directory decline rates.  I think Chanos should be compared to all the alternatives available not just shorts. 

 

Packer

[mcliu]

Very interesting discussion!

 

I think the problem is that you can't really spend "alpha" in Chanos' sense. Even though a portfolio incorporating Chanos' fund will have a higher Sharpe, you'll still be worse off in $ terms if you're invested without his fund. I guess it comes down to whether you believe portfolio volatility is a measure of risk.

[RichardGibbons]

Very interesting discussion!

 

I think the problem is that you can't really spend "alpha" in Chanos' sense. Even though a portfolio incorporating Chanos' fund will have a higher Sharpe, you'll still be worse off in $ terms if you're invested without his fund. I guess it comes down to whether you believe portfolio volatility is a measure of risk.

 

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.

[skanjete]

In my view Chanos fund has to be considered as a service, not an investment. There is a market demand for short exposure, and he provides that service. That's all there is to it. He has carved out a niche in the fund management business and his service has a good reputation.

 

I would be very supprised if he invested all his personal net worth in short investing. But that wouldn't be contradictory, because Chanos is not really investing and aiming the highest possible absolute return, he is providing a service, fulfilling a market demand. And he's good at it.

Actually, if he would invest his personal net worth into long situations only, that would be a perfect hedge with his fund activities.

 

 

 

[Guest longinvestor]

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...

 

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!