Quant Shorting and Contrarians

By pjain      Published Dec. 8, 2019, 1:05 p.m. in blog Invest   

Keys to Shorting

ETF Index pump and dump schemes - RUT2000 fraud shorting

• Large flows into passive investing creates opportunity • Russell 2000 inclusion is very rules based and rebalances in May– if you can get to $150million market cap, index will include you with no regard to if it is a legitimate company • Russell 2000 stock promotions – get into index in May and then get ETFs to buy in June and then dump the stock after • Several fraudsters have taken advantage of the Russell 2000 fraud including Jason Galanis, Benjamin Wey, Howard Appel * Class of 2019 potential frauds – gained admission to Russell 2000 in June but have not gone to zero yet o YCBD – merged with Level Branding to get listed on NYSE o Pareteum: telecom o Wrap Technologies: next gen solution for non lethal law enforcement

Mike Wilkins, Kingsford Capital Management (short-only firm) Idea: Shorts and frauds • Focused on shorting pump and dump schemes

Shorting Majors

Jim Chanos

George Soros - globalist, currency

Inception, DNA

Soros Fund Management, LLC is a private American investment management firm. It is currently structured as a family office but formerly as a hedge fund.

The firm was founded in 1969 by George Soros. Soros turned an original seed funding of $12 million into $20 billion by the first decade of the 21st century.

In 2010 was reported to be one of the most profitable firms in the hedge fund industry, with $32b in profits since 1973, averaging a 20% annual rate of return over four decades.

The company invests in public equity and fixed income markets worldwide, as well as foreign exchange, currency, and commodity markets, and private equity and venture capital funds. The company is reported to have large investments in transportation, energy, retail, financial, and other industries.

Soros Way

It's not easy emulating the portfolio results of George Soros.

  1. You need a great deal of patience, discipline
  2. Detailed hard research that Soros uses in his big positions
  3. In particular take into account both the economic and the political realities
  4. Sticking with your convictions
  5. Getting out when your gut tells you to.

Market Reflexivity theory - Reality of Investment Behavior

Reflexivity in economics is the theory that positive feedback loops exists in which investors' perceptions affect expectations, which in turn affect economic fundamentals. This can cause price trends that substantially and persistently deviate from equilibrium prices. In turn this changes investor perception.

Reflexivity theory states that investors don't base their decisions on reality, but rather on their perceptions of reality instead. The actions that result from these perceptions have an impact on reality, or fundamentals, which then affects investors' perceptions and thus prices. The process is self-reinforcing and tends toward disequilibrium, causing prices to become increasingly detached from reality. Soros views the global financial crisis as an illustration of the theory. In his view, rising home prices induced banks to increase their home mortgage lending and, in turn, increased lending helped drive up home prices. Without a check on rising prices, this resulted in a price bubble, which eventually collapsed, resulting in the financial crisis and Great Recession.

Soros believes that reflexivity disproves much of mainstream economic theory concepts

  1. Economic equilibrium

  2. Equilibrium prices are implied by the real economic fundamentals, supply and demand.

  3. Rational expectations between eg pricing and demand and supply. This process includes both positive and negative feedback between prices and expectations regarding economic fundamentals, which balance each other out at a new equilibrium price.

  4. Efficient market hypothesis where actors engage in transactions at mutually agreed prices, this price process will tend to keep the market moving quickly and efficiently toward equilibrium.

  5. Classical economics tries to include consumer preferences or resource scarcity by causing market participants to rationally bid prices up or down based on their more or less rational expectations of what economic fundamentals imply about future prices.

However, there are PROBLEMS causing PERSISTENT distortions

  1. Often there ARE major obstacles to communicating information, or misinformation being spread
  2. Insider or propreitary information is ironically VERY prevalent amongst the smart money
  3. Emotions are paramount - market is far from irrational!
  4. Herd instinct is very high - the vast majority buy at highs and sell at lows!
  5. Central Bankers and Currency controls by ECB,BoJ distort markets
  6. Massive MAJOR debt cycles and leverage. The use of leverage and the availability of credit in creating MAJOR demand.

Due to above factors, prices might deviate from the equilibrium values by a significant amount persistently over time and not "real-time" equilibrium.

In Soros’s opinion, this is because the process of price formation is reflexive and dominated by positive feedback loops between prices and expectations. Once a change in economic fundamentals occurs, these positive feedback loops cause prices to under- or overshoot the new equilibrium.

Soros thinks reflexivity should become a major focus of economic research, and even makes grandiose claims that it "gives rise to a new morality as well as a new epistemology.

Soros is the main advocate of using reflexivity as the cornerstone of his investment strategy. It’s a unique method that values assets by relying on market feedback to gauge how the rest of the market is valuing assets.

Market Bubbles and reflexivity

Soros uses reflexivity to predict market bubbles and other market opportunities.

Soros uses evidence of boom-bust cycle and various episodes of price bubbles followed by price crashes, when it is widely believed that prices deviate strongly from the equilibrium values implied by economic fundamentals.

He often makes reference to the use of leverage and the availability of credit in initiating the process, and the role of floating currency exchange rates in these episodes.

Bust Cycles and Snap-backs

Eventually, the trend reverses once market participants recognize that prices have become detached from reality and revise their expectations (though Soros does not recognize this as negative feedback).

Apply the scientific method - test it first

Soros also bases his market moves on the scientific method – creating a strategy that tracks what will transpire in the financial markets, based on current market data. Invariably, Soros will test his theory with a smaller investment first, then broadens his investment if the theory proves positive.

Trust your intuition - Physical cues

Getting out when your gut tells you to.

Soros also listens to his body when making investment decisions. A headache or a backache has proven enough for him to abandon an investment.

Blend political acumen with investment acumen

On September 16, 1992, Soros famously bet heavily against the U.K. government’s decision to hike interest rates. That would set off a trigger effect, devaluing the British pound and sending stocks higher after that devaluation. That move earned Soros $1 billion, along with the famous moniker as “The Man Who Broke the Bank of England.” Effectively, Soros went short a position in the British Pound (worth $10 billion) and earned $1 billion as the British currency slid amid political and economic turmoil linked to a policy of higher interest rates.

Consolidate . . . and reflect, Get a Team to Review, Why NOT!

Soros uses a handful of advisors to make big investment decisions. Once he confers with his team of analysts, making sure to review at least one contrary view to his strategy, Soros says he takes time “to read and reflect” before pulling the trigger.

HF Major Holding 20190930 ETFs - go in and out while waiting

  • GOOG
  • QQQ - go in and out - but had 5% in Q3 between $170-$190
  • SPY
  • IWB - Russell 1000

  • Front ran AABA, RHT - as they got sold out

    • AAPL strong big position in Aug'2018 but sold out by mid'19
    • DIS - strong position till Q2'19 but sold by Q3
    • SYMC
  • New Cos, IPOs

    • LYFT - sold out
    • PTON

HF Recent New Buys 20190930

TSN,Food ADM - sold out? by Q3'19 CAG - obtained byproduct of acq - sold out MKC - boosted during Q4'18 but seems exiting by Q3'19

ENR

EBAY,EC

FTCH,Disc RH,Disc EPC,beauty MDLZ

UNH

LCI CELG,Biotech

ALC,hDev

REITs, Utilities

KBH,Homebuilders DHI - sold Q3'19 VMC

NRZ,REIT NLY,mort-reits AGNC

D,Util-Regu DUK,Util-Regu VST,Indep Power Producers NRG

EPD,pipelines MMP,midstream ET WES EQM

Energy

XLE - diversified energy producers XOP - E&P and Production etf COG,Oil E&P CXO SEMG MNRL HOS FLMN

LNG,Cheniere Gas BP,Oil

SLB,Energy-services

Commodities, Materials, Defense, Industrials

BBL,Mat GDX

ZAYO,Hw TDG,AerospaceMidcap BA

ERI,Gambling - bought out caesers VICI - sold Q3'19 - gambling - bankruptcy reorg CZR - sold out in bankruptcy reorg

Financials

XLF ORCC,Credit Services NAVI,Credit COF DFS

KKR,AM BX,AM TROW BK AMP BEN NTRS BLK IVZ

SPGI,markets-scoring GS,Traders ICE,Markets NDAQ,Markets SCHW

BGCP,HF EVR,HF

CB,Insurance TRV MMC PGR AFL ALL AON PRU AIG MET

ALLY,FinBank PNC USB CFG TFC, BB&T ZION HBAN KEY STI CMA FITB

C,Big Banks JPM BAC SYF

Tech, SaaS

EEFT,FinSwpay NLOK,Lifelock-norton - smart acq/mgt

NXPI,Semi

LBRDK - liberty broadband ~20% portfolio

1992 Broke Bank of England

  • Britain joined the European Exchange Rate Mechanism, or ERM, in 1991 during a period of high inflation and low interest rates. As part of that agreement, Britain vowed to keep the pound within a certain band in relation to the German mark and, in order to keep the two currencies within the range, it was forced to keep raising interest rates to attract buyers for its currency.

  • Soros recognized the pound was overvalued versus the German mark and started to bet against the British currency. British government policy in the period had been widely criticised for providing speculators with a one-way bet.

  • Soros began building a short position in the British pound. According to his colleagues, he carried a $1.5 billion short position for most of the summer.

  • The British government defended the pound by raising interest rates more and more. The government soon realized it would pay out massive amounts of money to defend the pound.
  • German officials also made public statements that realignment within the ERM might be possible in mid-September.
  • In response to these comments by German officials, Soros decided to increase the size of his bet massively. He went from a $1.5 billion position to a massive $10 billion in the middle of September. He knew that the British government was having trouble keeping the currency propped up. Either the pound stayed relatively stable, in which case Soros and his investors would lose a little money, or the alternative was their bet would pay off. Thus, this was a low-risk, high-opportunity trade. Even with $10b at stake, it cost the UK govt a LOT more.

  • UK quit the ERM peg, allowing pound to float freely wef 9/16/1992. Essentially ending in the ejection of the pound sterling from the Exchange Rate Mechanism of the European Monetary System The next day the pound fell 15% versus the German mark and 25% against the U.S. dollar.

  • In the week leading up to September 16, 1992 or "Black Wednesday," Quantum Funds earned $1.8 billion by shorting British pounds and buying German marks. This transaction earned Soros the title of "the Man Who Broke the Bank of England". NOTEWORTHY: Soros doubled up despite backing of LARGE GOVTS OF UK and GERMANY!

1997 Asian Crisis bet against Thai baht

Soros fund made huge large profits betting against the Thai baht in early 1997 before the Asian financial crisis.

It is estimated that he bet $1 billion of a $12 billion portfolio that the currency would implode, which eventually happened when the Bank of Thailand had run out of ammunition to support its currency and fend off short sellers. Soros later clarified that he had sold those Asian currencies short early in 1997, months before the crisis. "By selling the Thai baht short in January 1997, the Quantum Fund managed by my investment company sent a market signal that the baht may be overvalued," according to Soros.

2000 HUGE tech losses

In 2000, the Quantum Fund lost its position as the largest hedge fund in the world when its assets under management changed $10 billion to $4 billion in about a year's time due to technology stocks.

2008-2011 How did they profit through GFC?

On March 14, 2008, George Soros purchased a huge chunk of Bear Stearns' stock, valued at $54 per share. Only days later, the fabled Wall Street investment firm was sold to J.P. Morgan at $2 per share. Soros was correct in his assessment that Bear Stearns was on the trading block. But he was dead wrong on the takeover value of the company, an expensive lesson he details in his book, “The New Paradigm for Financial Markets.”

The firm acquired a stake in Lehman Brothers just prior to its failure in 2008. Did it think it would be bailed out? But it did NOT happen!

In 2009, Soros Fund Management partnered with six other hedge funds to acquire IndyMac Bank at a cost of $13.9 billion, thereby gaining control of an estimated $160 billion in bank loans, investments and deposits.

In 2010, the company was reported to have created $32 billion in profits since 1973, making it one of the top profit making hedge funds in the industry.

2011 Commodities and Energy

In 2011 partnered with Silver Lake Partners and created fund called Silver Lake Kraftwerk whose focus was investing in natural resource and energy companies.

2013-14 Bet against Yen and QE - Soros Beat BoJ

The Japanese Prime Minister Shinzo Abe was engaging in Abenomics an extensive monetary easing to jump-start Japan’s stagnant economy. The easing had the effect of devaluing the yen against the USD and maintaining Japan's economy GDP and exports.

This was a straddle trade as Soros was long the Nikkei, the Japanese stock market. The yen weakened around 17% during the time of Soros’ wager, while the Japanese stock market rallied around 28% before eventually selling off. These bets once again netted Soros around $1 billion.

2016 Finances risky SolarCity acquisition by Tesla

In September 2016 Soros Fund Management advised a private investment fund tied to Quantum Strategic Partners, which injected the bulk of $305 million into SolarCity, producer of solar panels. The flow of cash allowed Elon Musk, chairman of Tesla Motors and SolarCity, to purchase SolarCity and merge it with Tesla.

2016+ Political distractor - heavily left, neo-liberal, globalist, pro-immigration

In the 2016 election cycle, Soros Fund Management donated over $10 million to Hillary Clinton's presidential campaign through super PACs

2018 Soros to short cryptos

it was reported that the family office of George Soros, Soros Fund Management, is prepared to trade cryptocurrencies, though Soros called digital assets a typical "bubble" at the World Economic Forum in January 2018.

Carl Icahn

David Einhorn Greenlight Capital


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