Michael Burry’s Scion Management averaged down on the fund’s position in Tailored Brands (TLRD), buying 402,900 shares of the distressed retailer in the days leading up to March 16. Scion now owns 7.2% of the company. TLRD closed at $1.29 on March 20, down 69% year-to date. But while Scion’s small cap investments have taken a hit during the Coronavirus crash, the passive investing bubble Burry warned about last fall may be bursting. In a March 12 Bloomberg interview, Burry said he was profiting from bearish bets on stock indexes.
The S&P 500, down 33% since hitting a bull market high on Feb. 19, has fallen about 9% since that interview.
Back on August 30, Scion Capital filed an initial 13D on Tailored Brands(TLRD) disclosing a 5.18% position in the troubled formal apparel retailer that owns Men’s Warehouse and Jos. A. Bank. Burry disclosed sending three separate letters to management. In the letter dated August 30, Burry reiterated that TLRD should cut its dividend and buy back shares. On Aug. 30 TLRD closed at $5.42 — more than three times its price on Friday.
However, the long positions in Burry’s fund represent only about 1/3 of Scion’s assets under management (AUM). Scion’s most recent ADV filing disclosed $263,255,046 of AUM. Scion’s 13F filing for Q4 2019 showed $82,298,000 in long securities. (Only long equities are disclosed in 13Fs). It’s reasonable to assume that the other 2/3 of Scion’s assets are substantially comprised of short bets.
On March 12, Burry told Bloomberg he had a “significant” bearish bet on stock indexes.
Burry told Bloomberg that he had amassed a “significant” bearish wager that was performing well as riskier assets fell. He also warned of an exodus from passive investments as the Coronavirus pandemic batters the global economy. He elaborated:
“I have had a significant bearish market bet that is working out for now…a global pandemic is absolutely a potential trigger for the unwinding of the passive investing bubble. With Covid-19, the hysteria appears to me worse than the reality, but after the stampede, it won’t matter whether what started it justified it.”
Burry, of “Big Short” fame, made a fortune betting against CDOs of subprime mortgages prior to their 2008 collapse. He sees similarities with the recent boom in passive investing.
Michael Burry shot to fame — and made a fortune for his clients and himself — by betting against mortgage securities before the 2008 financial crisis. Burry was played by Christian Bale in the film version of Michael Lewis’s book, “The Big Short.”
The passive investing bubble Burry warned about may be bursting in the Coronavirus crash. Burry said central bank stimulus, which underpinned an 11-year bull market in large-cap stocks, can’t do much to help during a pandemic.
Last fall Burry cautioned that the flood of money into index funds was distorting prices for stocks and bonds. He saw it as similar to how purchases of collateralized debt distorted subprime mortgages before the crisis. Stock markets and fund inflows continued to surge for months after Burry’s comments. But recently some passive products have begun suffering withdrawals after pandemic fears sparked a sell-off in global shares and corporate bonds. He said back then:
Burry: The fundamental concept of the passive investing bubble “is the same one that resulted in the market meltdowns in 2008.”
“Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies — these do not require the security-level analysis that is required for true price discovery.
“This structured asset play is the same story again and again — so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in.
“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.”
Burry’s increase in his battered Tailored Brands position is a reminder that the “Big Short” manager’s true love is value investing, particularly small cap value. He’s focused on identifying small-cap stocks that have been unduly punished in the rout. He told Bloomberg that “at some point” he will close out his bearish bets and shift the money into stocks.
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