Chanos Nice Interview

[thepupil]

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.

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.

[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...

 

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?

[bmichaud]

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!

 

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?

 

No you are not the only one. It's ABSURD to say that Chanos does not add value. +2.1% over 20 years versus +12.7% for the market? That's 14.8% alpha.

 

Sanjeev compares his performance to the market and other participants. This is no different - Chanos just happens to short. Yes he is not morally all there - is Buffett? Chanos was part of the short attack on Prem was he not? Hence the animosity toward him.....

 

Think of it this way....Baupost hedged significantly leading up to the 2000 bubble peak. Not sure what the exact numbers were, but I am pretty sure he hedged using index puts etc....Doing so would have generated the following losses on that hedge:

 

1996: -23%

1997: -33%

1998: -29%

1999: -21%

 

Compound that all together and you lost 72% of your original hedge position.

 

Now compare to Chanos:

 

1996: -14%

1997: +5.4%

1998: -1.3%

1999: -.8%

 

Compounded together, your hedge position via Chanos' fund lost 11% cumulatively. HOW IS THAT NOT VALUABLE ALPHA IF YOU ARE LOOKING TO HEDGE THE MARKET?

 

Ok so now let's look at how the market hedge would have performed when needed, i.e. in the 2000 and 2002 downturns....

 

Market:

 

2000: 9.2%

2001: 11.9%

2002: 22.2%

 

Compound those three returns with the returns from above, and your original $100 market hedge position initiated in 1996 is now worth $43. CONGRATULATIONS.

 

Now Chanos:

 

2000: 47.4%

2001: 18.2%

2002: 35.4%

 

Compound those with the returns from above.....and your $100 hedge position from 1996 is now worth $209.

 

 

This is not even a debate. If Chanos' fund is looked at as a market hedging tool, then like with a market hedge you want to utilize it when the risk reward is best. You would not employ Chanos at the 2002 and 2009 market bottoms. Would you utilize him now? HECK YES. Why?

 

1. Because even if the market continues to move up, he has proven to add significant short alpha when the market is going up, thus you will not have your market hedge decimated like you would have from 1996-2000, and...

 

2. He adds SIGNIFICANT alpha in actual market downturns b/c most of the time the crappiest companies will get crushed in a downturn.

 

 

Again, zero debate here.

[merkhet]

 

 

No, it's not about being a better lemming.

 

 

Again, zero debate here.

 

 

I too find that the best way to keep yourself from becoming a lemming is to engage in no debate. :P

 

I believe this is an argument that will not be resolved between the two sides. I think it'd be useful to consider the opportunity cost of shorting -- being up 50% on X% of your portfolio in a year where the rest of your portfolio is down 50% is only useful in so far as the redeployed capital can then capture the lost opportunity cost of not having invested your X% of the portfolio at a compound rate commensurate with the (1-X)% of your portfolio. Otherwise, it's probably a really expensive alternative to the pepto bismol I can purchase from CVS to deal with volatility.

 

Example:

 

Split your portfolio 50-50.

 

Market: 15% per year

 

Long: 25.89% per year for 10 years (10x return)

Short: 0% per year for 10 years (the pupil & bmichaud might consider this significant alpha)

 

In the 11th year, 50% correction to the market and the long portfolio so it's merely a 5x return or a 15.75% return per annum.  Better hope the short portion (up 50% in the 11th year) of the portfolio can create a 3.33x bagger just to break even with the opportunity cost.

 

So I'd say the answer is "it depends" rather than "there's no debate."

[AZ_Value]

Haha. I think someone needs to defend thepupil here because his points are more than valid in my opinion.

 

The fact is that not everybody is made equal, and like it or not, some managers out there prefer a smooth 12% performance to a lumpy 15% and if it helps them sleep at night and/or keep their job who am I to judge them?

 

I personally don't subscribe to that but I also think us value investors way too often have a "holier than thou" attitude towards everybody else because we know our way is probably the most logical in the long term, even though we know from the start that the majority of investors don't have the discipline it takes to be a value investor.

 

And when you look at it from that standpoint, the numbers in the document posted by Sanjeev speak for themselves.

Out of the 19 full years provided, the S&P had 4 down years (down -11.6% on average), the short fund URSUS was up 42.9% on average.

For the 15 up years for the S&P it was up an impressive 20.3% on average across those years and URSUS was only down -2.4% on average.

 

This is quite valuable for managers who care about mitigating the pain of down years. very valuable.

And over the whole period to have a short only fund have 2% CAGR while the index is roaring at 13% is quite impressive. All you have to do is look at how painful the Fairfax short book has been in the recent years of market advance and you'll know how difficult this is.

 

Now I can't cast a judgement on Chanos as a man or his moral character which seems to be part of the issue here, but as always, numbers don't lie.

[bmichaud]

 

 

No, it's not about being a better lemming.

 

 

Again, zero debate here.

 

 

I too find that the best way to keep yourself from becoming a lemming is to engage in no debate. :P

 

I believe this is an argument that will not be resolved between the two sides. I think it'd be useful to consider the opportunity cost of shorting -- being up 50% on X% of your portfolio in a year where the rest of your portfolio is down 50% is only useful in so far as the redeployed capital can then capture the lost opportunity cost of not having invested your X% of the portfolio at a compound rate commensurate with the (1-X)% of your portfolio. Otherwise, it's probably a really expensive alternative to the pepto bismol I can purchase from CVS to deal with volatility.

 

Example:

 

Split your portfolio 50-50.

 

Market: 15% per year

 

Long: 25.89% per year for 10 years (10x return)

Short: 0% per year for 10 years (the pupil & bmichaud might consider this significant alpha)

 

In the 11th year, 50% correction to the market and the long portfolio so it's merely a 5x return or a 15.75% return per annum.  Better hope the short portion of the portfolio can create a 3.33x bagger just to break even with the opportunity cost.

 

So I'd say the answer is "it depends" rather than "there's no debate."

 

This is not a debate about hedging, it's a debate about the value, or lackthereof, Chanos adds.

 

If you want to hedge against market risk, there is no debate that Chanos is the better option based on historical data, unless the numbers Sanjeev posted are somehow false.

 

[merkhet]

 

This is not a debate about hedging, it's a debate about the value, or lackthereof, Chanos adds.

 

If you want to hedge against market risk, there is no debate that Chanos is the better option based on historical data, unless the numbers Sanjeev posted are somehow false.

 

 

That's why I'm saying that this is a debate that probably won't be resolved. The people speaking out against Chanos (stripping away any personal issues they may have) believe that the opportunity cost of shorting is probably high -- with or without an investment in Chanos' fund.  The people speaking in support of Chanos are saying that "If you must short, then..." The former group does not accept that premise. The latter group does.

 

Ergo -- debates with no end.

[bmichaud]

 

This is not a debate about hedging, it's a debate about the value, or lackthereof, Chanos adds.

 

If you want to hedge against market risk, there is no debate that Chanos is the better option based on historical data, unless the numbers Sanjeev posted are somehow false.

 

 

That's why I'm saying that this is a debate that probably won't be resolved. The people speaking out against Chanos (stripping away any personal issues they may have) believe that the opportunity cost of shorting is probably high -- with or without an investment in Chanos' fund.  The people speaking in support of Chanos are saying that "If you must short, then..." The former group does not accept that premise. The latter group does.

 

Ergo -- debates with no end.

 

 

 

Here is Sanjeev on the matter:

 

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

 

Chanos adds no value to his clients on a long-term perspective and his whole existence survives on his client's fears.

 

Long-term, he provides no value whatsoever and has been wrong far more than he's ever been right about markets!

 

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.

 

 

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!

 

 

 

 

Again, the debate is not about hedging. Sanjeev is saying CHANOS PROVIDES NO VALUE WHATSOEVER, while pupil and I are saying, THE NUMBERS PROVE OTHERWISE.

 

Sanjeev is saying Chanos had a couple of big hits. How can one possibly say that without providing evidence that he completely botched the 2005-2013 investment cycle? We only have returns through 2005, and they look pretty darn good.

 

Clearly there is a bias against Chanos if one cannot honestly admit that he has an absolutely phenomenal long-run shorting track record, considering really the most he can make on each investment is 100%.

[Cardboard]

I think that Chanos returns are amazing IF he is or was a short only fund. Otherwise, if it is more like a 50% long -50% short fund then it is pretty pathetic if I am to use the logic of Julian Robertson.

 

Now, assuming that he is much more short than long then yes delivering 2% a year over time against a rising market is very hard to do. Just go ask or see for yourself how difficult and detrimental it has been for hedge funds over the last 2 or 3 years to short stocks. Even with stocks in secular decline, they find ways to get lower cost funds, to restructure, to get bought out and to even attract fund managers in a rising market since they are cheap.

 

Personally, I have had it with shorting, hedging and all that. When Ron Baron started as an analyst, his boss called him into his office. He told him that he had talent but, that he should stop wasting time finding shorts. He then asked him: "Where are the short sellers yachts?"

 

If you look at all the rich people or money managers, how many do truly benefit from shorting? Buffett, Icahn, Nelson Peltz? Nope. They focus on finding good businesses at cheap prices and just buy them.

 

Chanos does have a yacht for sure but, he is in a tiny minority and that is because he has been able to offer that niche "service" built on the reputation from one huge win or Enron. I still think that this "service" is detrimental to pension funds since they could instead just go more into cash (10 or 20% more) when the S&P is high on a simple P/E basis and then invest that whole extra and more when the market is cheap. They would make the 2% in money market fund and a lot more with the cash invested on the rebounding market. While deploying 10% of their capital into Chanos means "locked" at 2% over the long haul or through thick and thin.

 

I think that a Kyle Bass approach is much more appropriate or to be mostly long and to find asymmetrical bets that will pay off based on very specific events.

 

Cardboard

[merkhet]

 

This is not a debate about hedging, it's a debate about the value, or lackthereof, Chanos adds.

 

If you want to hedge against market risk, there is no debate that Chanos is the better option based on historical data, unless the numbers Sanjeev posted are somehow false.

 

 

That's why I'm saying that this is a debate that probably won't be resolved. The people speaking out against Chanos (stripping away any personal issues they may have) believe that the opportunity cost of shorting is probably high -- with or without an investment in Chanos' fund.  The people speaking in support of Chanos are saying that "If you must short, then..." The former group does not accept that premise. The latter group does.

 

Ergo -- debates with no end.

 

 

 

Here is Sanjeev on the matter:

 

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

 

Chanos adds no value to his clients on a long-term perspective and his whole existence survives on his client's fears.

 

Long-term, he provides no value whatsoever and has been wrong far more than he's ever been right about markets!

 

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.

 

 

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!

 

 

 

 

Again, the debate is not about hedging. Sanjeev is saying CHANOS PROVIDES NO VALUE WHATSOEVER, while pupil and I are saying, THE NUMBERS PROVE OTHERWISE.

 

Sanjeev is saying Chanos had a couple of big hits. How can one possibly say that without providing evidence that he completely botched the 2005-2013 investment cycle? We only have returns through 2005, and they look pretty darn good.

 

Clearly there is a bias against Chanos if one cannot honestly admit that he has an absolutely phenomenal long-run shorting track record, considering really the most he can make on each investment is 100%.

 

Like I said, the debate that never ends.  I'll let Parsad defend himself, but I'll also amend my statement to say "The people speaking out against Chanos (other than Sanjeev)..."

 

I would also note that the first three points you cited turn on a nebulous definition of the word "value."

 

Also, I would think you could make 2% a year just by purchasing Treasuries, and they'd probably do well during a significant market correction.  That might be the cheaper alternative that Parsad is talking about.

[gg]

And when you look at it from that standpoint, the numbers in the document posted by Sanjeev speak for themselves.

Out of the 19 full years provided, the S&P had 4 down years (down -11.6% on average), the short fund URSUS was up 42.9% on average.

For the 15 up years for the S&P it was up an impressive 20.3% on average across those years and URSUS was only down -2.4% on average.

 

This debate is so ridiculous. Chanos is a good analyst and investor, and there's not really any data that can refute this. If you have a problem on whether or not short-selling funds have a place in a portfolio of fund investments, that's a different story. You may not need to shop at an oversized clothing store, but that doesn't mean that they don't serve a purpose to some part of the population, and that within that market, there are some better and worse retailers. To the extent that an investor (individual or institution) needs to smooth their returns, it is best to have something that has minimal burn in up markets, and maximum upwards convexity in down markets. There is no product of inexpensive hedge that exists that provides this. In order to have a minimal drag, and maximum convexity, you need to take a view on some metric (ie interest rates, index level) and also have a timeline by which it will happen. Off-the-shelf hedging products that perform well when the market is down and doesnt burn cash rapidly when the markets rip higher are a complete fiction. So to the extent that you need the closest thing for your portfolio, Chano's returns are close to as good as they get: up 4x the inverse of the S&P's down years, and down 1/10th of the inverse of the S&P's up years.

 

 

[Parsad]

 

This is not a debate about hedging, it's a debate about the value, or lackthereof, Chanos adds.

 

If you want to hedge against market risk, there is no debate that Chanos is the better option based on historical data, unless the numbers Sanjeev posted are somehow false.

 

 

That's why I'm saying that this is a debate that probably won't be resolved. The people speaking out against Chanos (stripping away any personal issues they may have) believe that the opportunity cost of shorting is probably high -- with or without an investment in Chanos' fund.  The people speaking in support of Chanos are saying that "If you must short, then..." The former group does not accept that premise. The latter group does.

 

Ergo -- debates with no end.

 

 

 

Here is Sanjeev on the matter:

 

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

 

Chanos adds no value to his clients on a long-term perspective and his whole existence survives on his client's fears.

 

Long-term, he provides no value whatsoever and has been wrong far more than he's ever been right about markets!

 

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.

 

 

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!

 

 

 

 

Again, the debate is not about hedging. Sanjeev is saying CHANOS PROVIDES NO VALUE WHATSOEVER, while pupil and I are saying, THE NUMBERS PROVE OTHERWISE.

 

Sanjeev is saying Chanos had a couple of big hits. How can one possibly say that without providing evidence that he completely botched the 2005-2013 investment cycle? We only have returns through 2005, and they look pretty darn good.

 

Clearly there is a bias against Chanos if one cannot honestly admit that he has an absolutely phenomenal long-run shorting track record, considering really the most he can make on each investment is 100%.

 

Why is it biased?  Here's a perfectly good alternative to Chanos that is cheaper and provides better long-term returns with no down years...Vito Maida's Patient Capital:

 

http://www.patientcapital.com/calendar-year-returns#chart3

 

Modern portfolio theory emphasizes asset allocation examining beta and correlation with market indices, so you create a market for someone like Chanos, who really does not need to exist and adds little value to his investors. 

 

Vito has had no down years, including severe S&P years, while providing upside returns 4 times greater than Chanos.  If you think Chanos is good at shorting, than Vito must be phenomenal simply as one who deploys capital...and that is what it comes down to...deployment of capital and mitigating risk, not being simply long or short.  Cheers!

[bmichaud]

Very impressive record. Is he a purely short fund? Looks like a market-neutral fund given the unimpressive returns since 2009.

 

It goes back to whether this is a hedging debate or a does-chanos-add-value debate. If Chanos is viewed as a hedging tool, he adds significant value and would be preferred over PCM in tough environments.

 

If it is a Chanos v. PCM over the long-term debate (who would ever hold a short-biased fund for the long term....), then obviously PCM wins. BUT, if that is the debate, then even PCM loses out to superior long-term compounders such as Loeb, Ackman, Icahn and Buffett. It's unfair to compare PCM to Chanos if PCM is not short-only or largely short-biased.

 

If Chanos is used as a hedging tool, then it is a highly valuable fund. There are few non-short biased funds out there (at least to my knowledge) that consistently generate positive returns through nasty downturns like the PCM fund. Perhaps you know more. If so, then I stand corrected.

 

Loeb, Einhorn, Ackman, Buffett, Icahn etc... etc.... all had negative years in 2008. If you were looking to hedge well-research undervalued companies through 2007 and 2008, you would not go out and double your long exposure by putting money into one of these funds (including PCM), you would go to cash or give money to Chanos. Nobody who is long biased can provide consistent protection in down markets.

[Parsad]

Very impressive record. Is he a purely short fund? Looks like a market-neutral fund given the unimpressive returns since 2009.

 

It goes back to whether this is a hedging debate or a does-chanos-add-value debate. If Chanos is viewed as a hedging tool, he adds significant value and would be preferred over PCM in tough environments.

 

If it is a Chanos v. PCM over the long-term debate (who would ever hold a short-biased fund for the long term....), then obviously PCM wins. BUT, if that is the debate, then even PCM loses out to superior long-term compounders such as Loeb, Ackman, Icahn and Buffett. It's unfair to compare PCM to Chanos if PCM is not short-only or largely short-biased.

 

If Chanos is used as a hedging tool, then it is a highly valuable fund. There are few non-short biased funds out there (at least to my knowledge) that consistently generate positive returns through nasty downturns like the PCM fund. Perhaps you know more. If so, then I stand corrected.

 

Loeb, Einhorn, Ackman, Buffett, Icahn etc... etc.... all had negative years in 2008. If you were looking to hedge well-research undervalued companies through 2007 and 2008, you would not go out and double your long exposure by putting money into one of these funds (including PCM), you would go to cash or give money to Chanos. Nobody who is long biased can provide consistent protection in down markets.

 

That's because you are viewing it as the institutions do through MPT...their cycle is 6 months to a year out.  They've created this demand for Chanos...fundamentally he should not exist, but he does because of the way institutions view markets and volatility.  Cheers!

[bmichaud]

How is using Chanos as a hedging tool any different than your fund holding 40% cash or whatever it is? I agree, Chanos' fund should not be held over the long-term in the vein of "reducing portfolio volatility" as MPT would suggest. But that's not the debate (or at least I thought based on your "he adds no value" commentary), the debate is (or should be) does Chanos add value to the service he provides - i.e. as a hedge. Just b/c institutions have a faulty MPT-based view of portfolio management doesn't mean Chanos doesn't add value. Who is to say Chanos would not be around if a good portion of the hedge fund industry simply gave up trying to manage their own short book and just outsourced it to Chanos? How do we even know what % of his AUM are comprised of MPT-believing institutions?

 

If you were Icahn, who currently wants to hedge (and is hedging) his portfolio, why would you not just outsource it to Chanos in order to avoid the large performance drag an SPX short position imposes?

[thepupil]

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

[thepupil]

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.

 

[thepupil]

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.

 

[bmichaud]

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

 

Given how bad Chanos' record is, perhaps him going out to raise capital for more shorting is a buy signal

[Liberty]

Recent interview with Jim Chanos:

 

[dcollon]

Enjoyed the interview...thanks for posting Liberty.

[LongTermView]

I like the way he answered the question on technical analysis at about the 1:13:00 mark:

but we found that by and large the ability of the immediate past price performance to predict the future is kind of a coin flip.

[frommi]

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.

 

I`ve built on your idea and created a test to show myself that the idea to balance longs and shorts based on something like CAPE10 or regression to trendline improves results further. But i did use  results from Montiers backtest instead of Chanos returns from his 2008 paper http://www.designs.valueinvestorinsight.com/bonus/bonuscontent/docs/Montier-Shorting.pdf. For the long side i used the results from the dividend aristrocats, but with SPY returns are similar.

 

https://docs.google.com/spreadsheets/d/1jyYcfKdzxg-Pm1Uc4W57QdlXoXdCUfvh08o8PL6QpAg/edit?usp=sharing

 

So in essence with a static 130%/80% long/short allocation you could have reached 17.8% returns while 100% SPY or NOBL reached a 10% return over that timeframe. But with a variable allocation depending on the current valuation of the market you can reach 20% returns with lower overall drawdowns. And this is without any alpha on the long side!

[UK]

https://www.institutionalinvestor.com/article/b1b00ynrgtn05r/How-Jim-Chanos-Uses-Cynicism-Chutzpah-and-a-Secret-Twitter-Account-to-Take-on-Markets-and-Elon-Musk#.W6Ab18QGsgd.twitter

[Liberty]

Hour-long interview with Chanos (april 2):