Scion’s ADV Part 2 — A deep dive into Dr. Michael Burry’s hedge fund business

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Scion’s ADV Part 2 filed with the SEC provides insights into the business practices and strategies of renowned investment manager Dr. Michael Burry.

One of the world’s most intriguing fund managers, Burry made himself — and investors in his Scion hedge fund — hundreds of millions shorting sub-prime mortgages during the financial crisis a decade ago.

However, Burry is reclusive. Though most hedge funds tend to be secretive, Burry’s strategies carry an added layer of mystery. Scion Asset Management has only the most basic of websites. Anyone wondering what levers Michael Burry is pulling behind the curtain won’t learn anything from the manager’s website.

But investors aren’t left completely in the dark. As we know, the SEC requires large money managers to disclose their positions quarter in 13F filings. Much can be gleaned from 13Fs. We’ve covered Scion’s 13F portfolio previously here, here and here.

Investors seeking to profit by studying the moves of a hedge fund can gain valuable insights from ADV part 2.

Many investors don’t realize that a wealth of information on individual hedge funds — indeed any U.S. investment manager — can be found on the SEC’s Investment Adviser Public Disclosure website. All investment advisers must periodically update detailed information about their advisory business and investment strategies via ADV filings.

There are two parts to the ADV disclosure. Part one is a standardized form wherein the adviser fills in basic information about its operations.

But it’s the ADV part 2 — alternately called the “firm brochure” — that offers the most interesting and informative reading for investors. ADV part 2 is intended to describe detailed information that an investor considering placing funds with a manager should know.

Let’s do a deep dive into Scion’s ADV part 2 and see what we can learn about Michael Burry’s operations and strategies.

Item 4: Advisory Business – Only 37% of Scion’s assets are invested in long securities

We learn that as of Dec. 31, 2018, Scion managed $263,255,046 of assets on a discretionary basis. Scion’s first quarter 13F filing disclosed $98,181,000 in long holdings. So the difference between the two — about $165,000,000 — is invested in non 13F securities. This would be short positions, derivatives and other non-equity holdings.

We also learn in Scion’s ADV part 2 that Scion is a limited liability company organized under the laws of the State of Delaware. It began operations in 2013, and “The investment activities of Scion are led by Dr. Burry together with other investment professionals who assist in executing the investment strategy.”

Scion provides discretionary investment advice to separately managed accounts (SMAs) and the following private investment funds:

  • Scion Master G7, L.P. (the “Master Fund”), a Cayman Islands exempted limited partnership;
  • Scion G7, L.P. (the “Onshore Fund”), a Delaware limited partnership;
  • Scion G7 Offshore, Ltd. (the “Offshore Fund”), a Cayman Islands exempted company;
  • Scion Value G7, L.P. (the “Value Fund”), a Delaware limited partnership; and
  • Scion Asia, LP, (the “Asia Fund”) a Delaware limited partnership.

Both separately managed accounts and fund investors

…seek long-term capital appreciation. Scion plans to pursue Clients’ investment objectives primarily through fundamental research in pursuit of undervalued and/or misunderstood investment situations in the global theater. This fundamental research may take into account technical, macroeconomic, and other tactical approaches to the ever-changing securities marketplace. Scion may cause Clients to take either “long” or “short” positions, as opportunities warrant. In addition, Scion may apply both long-term and short-term strategies in individual securities.

Item 5: Fees and Compensation – Scion charges “2 and 20” fees.

Scion’s ADV Part 2 discloses that “Scion be entitled to up to a 20% share in the appreciation in value of each Client’s account balance, including profits from Designated Investments, and subject to a loss carryforward procedure, on an annual basis.

Item 7: Types of Clients — No surprise: You gotta be rich to invest with Michael Burry

You can’t invest small potatoes in Michael Burry’s funds: “The minimum commitment for an investor is generally $1 million for the Onshore Fund and Offshore Fund, $0.5 million for the Value Fund, and $1 million for the Asia Fund. There is no minimum to establish a separate account…Each applicable investor in a Fund is required to meet certain suitability qualifications, such as being an “accredited investor” or a “qualified client.” Basically, to invest with Burry, you must be a multi-millionaire.

Item 8: Methods of Analysis and Risk of Loss – Burry uses a wide range of investment strategies in Scion. And they all carry risks.

According to Scion’s ADV part 2, SMAs and the funds “seek long-term capital appreciation and will invest, primarily, in equity, debt, and derivative instruments globally.”

Scion may cause its Clients to take either “long” or “short” positions, as opportunities warrant. In addition, Scion may apply both long-term and short-term strategies in individual securities. Scion will consider and invest in opportunities of any type that Scion considers attractive in the circumstances. Scion’s investment professionals have specific prior experience managing portfolios employing equities, special situations, bonds, derivatives, macroeconomics, and activism, and Scion may employ any one or more of these strategies.

Methods of Analysis:

Scion plans to pursue Clients’ investment objectives primarily through fundamental research in pursuit of undervalued and/or misunderstood investment situations in the global theater. This fundamental research may take into account technical, macroeconomic, and other tactical
approaches to the ever-changing securities marketplace. Investment in individual equities based on Scion’s fundamental, value-oriented analysis will often be a principal emphasis.

However, at times investment theses may be based on macro trends and opportunities as much as individual value analysis. Scion may use both traditional and proprietary analysis and techniques to identify attractive short selling opportunities, largely for securities that Scion believes are overvalued and/or facing technical factors that Scion believes ought to depress the securities’ prices. Scion is not required to engage in short selling or to use any techniques for hedging purposes.

Don’t expect Burry to use the same playbook that made his client’s famously rich during the financial crisis.

From Scion’s ADV part 2:

Scion understands that profitable strategies in the first half of the 2000s were not the same strategies that were profitable in the second half of that decade. And Scion understands that this is true for most decades in modern times. Dr. Burry has been credited as an innovator in the use of certain complex investment strategies now widely employed by other funds. Such innovation may be a feature of future strategies of Scion’s Clients, even as specifics of such strategies cannot currently
be specified; Scion’s strategies and techniques are continually evolving and Scion will make investments that reflect that evolution in Scion’s discretion.

Risk of Loss:

Strange as it may seem, multi-millionaires must be warned that hedge fund investing can be risky! Scion’s ADV cautions that “As with any investment, a Client or an Investor could lose some or all of its investment.” The client brochure goes on to describe in detail the methods of analysis employed by Scion and the risks of investing in Scion. Here’s some highlights:

Dependence on the Investment Manager; Investment Discretion.


Market Judgment. The Investment Manager’s personnel will apply judgment as to overall market conditions and directions as a core part of implementing the Fund’s strategy at any particular time. The greater the role such judgment plays during any particular period, the more unpredictable and inconsistent a trading strategy is typically expected to be.


Fundamental Analysis. In addition to the risk of shortcomings in analysis, investments made based upon fundamental analysis are subject to significant losses when market sentiment leads to material discounting of market prices from the prices indicated by fundamental analysis (as in the case of “flights to quality” when the demand for certain risky investment instruments plummets) or when technical factors, such as price momentum encouraged by trend following, dominate the market.


Risk Management. The Investment Manager may fail to identify or
anticipate a wide variety of risks that may adversely affect the Client or the hedging or other risk mitigation techniques may not have the desired effect, potentially exposing the Client to material losses.

I’m a bit surprised to learn that Burry uses technical analysis as an investment tool.


Technical Analysis. The Investment Manager may incorporate elements of technical analysis —analysis of historical and current market data — into its investment decision making. Technical analysis is subject to the risk that unexpected fundamental factors or other factors that were not present during the periods from which historical data were generated on which decisions are based may arise and become dominant, at least for a time. Among other things, an influx of new participants in a particular market, structural changes in the markets, the introduction of new financial products, and other developments could materially adversely affect the validity of inferences from historical data and thus the profitability of investments based on technical analysis

Investments in Undervalued Securities, Short Selling, Derivatives, Credit Swaps and Credit Default Agreements are among many other strategies used by Burry in Scion that are subject to risk.

Read through the 30 pages of Scion’s ADV for yourself.

Disclaimer:

Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.