Burry’s Scion Capital

so far, we’ve seen Lehman Brothers and the legendary GS dodged the subprime mess and buck the larger trend. (and yes, JPMorgan who reported rise in earnings)

now its hedge fund!

 

HEDGE FUNDS

After shorting subprime, hedge fund is moving on

Burry’s Scion Capital, quadrupling its money, has begun to unwind positions

 

 

By Alistair Barr, MarketWatch

Last Update: 6:29 PM ET Oct 25, 2007

 

Print E-mail Subscribe to RSS Disable Live Quotes

 

 

SAN FRANCISCO (MarketWatch) — One of the hedge funds that made a killing by short-selling the subprime-mortgage universe has decided to look elsewhere for its next opportunity.

Michael Burry, head of the $621 million Scion Capital LLC, has informed investors that he’s unwinding a massive bet against subprime mortgages after generating a more than four-fold return.

“The opportunity in 2005 and 2006 to short subprime mortgages was an historic one,” Burry wrote in a letter to investors. “With continued hard work and a bit of luck, we will latch onto another opportunity like the subprime short. But I am not counting on it happening anytime soon.”

‘Twenty percent annual returns are my rough goal, and I feel that is a properly lofty goal.’ — Michael Burry, Scion Capital

At the beginning of this year, Silicon Valley-based Scion Capital held $1.7 billion worth of short positions on parts of subprime mortgage securities. A short position increases in value as the security in question falls.

But by mid-October, those short positions had been whittled down to $479 million, according to a letter that Burry sent to investors this month. A spokesman for the firm declined to comment on the letter, which was obtained by MarketWatch.

Burry unwound the positions from July through October, as the subprime mortgage problem grew into a global credit crisis. The bet so far has generated a return of well more than four times its original value, before fees, Burry noted in the letter.

Scion’s subprime coup significantly helped to give its investors overall gains of between 78% and 85%, after fees, during the first nine months of this year.

Since their inception in late 2000, the funds have surged more than 300%. During that time, the Standard & Poor’s 500 Index gained less than 10%.

The $1.8 trillion hedge fund business has had a mixed experience trading the subprime meltdown this year. Several firms, such as Scion and Paulson & Co., have generated huge returns betting against securities and companies involved. See full story.

Others, such as Sowood Capital Management and two funds run by Bear Stearns 

BSC 111.05, -2.49, -2.2%) , collapsed. See story on Sowood.

Scion’s Burry said in his October letter that it was time to “reset expectations,” noting that the firm’s returns have been “clearly outsized and far from normal.”

“Twenty percent annual returns are my rough goal, and I feel that is a properly lofty goal,” he wrote. “That is, it is not so high as to encourage excessive risk-taking.”

Some of that caution may reflect lessons Burry learned in 2006.

That year, Scion’s global strategy funds, the firm’s main investment portfolio, lost more than 16%. Burry had placed an early bet that the credit markets would deteriorate, but his strategy was too early in the view of some of his investors, and he was forced to withdraw their money well before the subprime debacle took shape.

“The pain was certainly intolerable for some of our investors, and some that were very close to me capitulated at the very bottom,” Burry recalled.

Investor withdrawals forced Burry to slash a $6.5 billion derivative bet against corporate debt down to roughly $2.2 billion, he noted. As subprime mortgage problems became a global credit crisis this year, Scion may have missed out on even bigger gains.

“Allowing some of the wrong sort of investors into the funds in previous years cost us substantial excess return this year, and that is my fault,” the fund manager wrote.

The $2.2 billion bet against corporate debt was still on at the end of September and it could still generate big gains if there’s more turmoil in the credit markets, he said.

Burry also expressed concern about rising credit card debt, which he said is being used to replace the money consumers used to get from refinancing their mortgages during the recent real estate boom. Corporate earnings are likely to be dented because of the “spent” U.S. consumer.

He also worried about the weakening of the U.S. dollar and its effect on inflation and foreign capital flows in the country.

Burry remains bullish on commodity-related stocks and has found “substantial value” in technology and housing-related sectors. He said he favors secular investing themes over cyclical bets, given “looming” problems in the U.S. economy.

Alistair Barr is a reporter for MarketWatch in San Francisco.