Fri, Jan 11, 2019|Whitney Tilson

ICR conf; Aphria; Green Growth Brands; Carson Block; Fahmi Quadir; What the Hell Happened to Hedge Funds?; Advanced Seminar on Short Selling

1. I just got back from CES last night and made plans to go to the ICR Conference in Orlando on Monday and Tuesday – if you're going to be there, let me know! It's mostly retail and restaurant companies, but this year I'm especially looking forward to the presentations by pot stocks Green Growth Brands, which made a bid for Aphria (see below), and Tilray, which the very hour it peaked on Sept. 19 at $300 in one of the largest short squeezes in history, I predicted on Yahoo Finance TV that it would fall by 90% within a year (at ~$100 today, it's well on its way). Then, Chris Brown of Aristides Capital pitched it at our shorting conference on Dec. 3 (see video here and slides here).

2. The story of Aphria keeps getting more and more absurd. After Gabriel Grego showed conclusively at our shorting conference that insiders have looted the company of hundreds of millions of dollars (see video here and slides here; further evidence that his report is correct is today's news that Chief Executive Vic Neufeld and Co-Founder Cole Cacciavillani will leave the company), the stock got cut in half, but has since rallied strongly, driven in part by Andrew Left's bullish report and a supposed takeover offer by an equally ridiculous and dicey party, Green Growth Brands.

I actually have to give Aphria credit for this devious scheme: if you're running a company and somebody reveals that you've stolen huge sums and the board has called for an investigation, what should you do? Quickly sell the company! And how do you make that happen? Have a related-party entity (as Hindenburg Research shows: The Latest Act in The Aphria Circus: A Very Obviously Related-Party 'Hostile' Takeover Offer) make a bogus bid to put the company into play and hopefully smoke out a real buyer!

It'll be interesting to see if Aphria can clean up its act and survive. It does have a real (albeit highly overvalued) business and just reported strong growth.

3. Speaking of short sellers who spoke at our conference, this article (the first of three by Michele Celarier) mentions Carson Block (see video here and slides here), Sahm Adrangi (see video here and slides here), and Ben Axler: Carson Block's Muddy Waters Gained 20 Percent in 2018. Excerpt:

Carson Block's Muddy Waters Capital gained 20 percent in 2018, its best year since the famous short seller launched his activist short hedge fund in 2016, according to an investor.

Muddy Waters, which has total assets of $210 million, unveiled three activist short campaigns last year, and all of them were winners for the firm. They are Canadian insurer Manulife Financial Corporation, China's Tal Education, and British semiconductor manufacturer IQE. The fund also makes other short bets that it does not disclose.

Overall, 2018 turned out to be a good year for activist short sellers. According to individuals familiar with the results, Ben Axler's Spruce Point Capital gained 25 percent for the year and Sahm Adrangi's Kerrisdale Capital surged 37 percent. Kerrisdale also benefited from some long positions.

4. Another interesting article by Michele about a short seller: Hacked Printers. Fake Emails. Questionable Friends. Fahmi Quadir Was Up 24% Last Year, But It Came at a Price. Excerpt:

Few people had ever heard of Quadir before the release of Dirty Money in January of last year. She has since stepped out of the shadows. At the age of 27 — after working only two years as an analyst at the small hedge fund that had shorted Valeant — Quadir launched her own hedge fund last January. The child of Bangladeshi immigrants who settled in the Long Island town of New Hyde Park, the young woman called her new firm Safkhet Capital, named after the Egyptian goddess of mathematics and wisdom.

At the start of 2018, Safkhet had two employees (both women) and about $6 million — a tiny amount for a hedge fund, even one dedicated to the risky business of short selling, a technique that bets that a stock will go down in price. Nonetheless, Quadir planned big. She immediately registered Safkhet with the Securities and Exchange Commission, looking forward to a big future that would draw in the type of institutional investors that largely eschew a fund whose manager has such a slim track record as hers.

Fortune favors the bold: 2018 would end with a market meltdown that left famous hedge fund managers nursing losses and facing redemptions. Quadir, on the other hand, is on the upswing. She starts 2019 with more than $35 million and five investors, with most of them signing up during the second half of last year. She's also boasting a net gain of 24.14 percent during a year when the S&P 500 fell 4.4 percent.

"To start a fund and to make it through a year, there's nothing that makes me more proud than that," Quadir exclaims in Safkhet's sparkling midtown Manhattan office in a Sixth Avenue skyscraper, its third home since launch.

Safkhet is all the more impressive since the number of women running their own hedge funds is a minuscule fraction of the total. Only 2.5 percent of the approximately 10,000 hedge funds are headed by women, according to Meredith Jones, who tracks diversity in finance and authored Women of The Street: Why Female Money Managers Generate Higher Returns (and How You Can Too).

Short selling is also largely a man's game — one that lost so many players in the decade-long bull market that Hedge Fund Research quit posting returns for a short-biased index at the end of 2017. But if recent trends are any indication, women can also play what can sometimes be the nastiest, most testosterone-dripping game on Wall Street, one replete with Twitter wars, lawsuits from target companies, and all types of intimidation.

At former hedge fund manager Whitney Tilson's most recent short-selling conference, held in December in New York City, five out of 22 presenters were women short sellers — although none are well known.

5. Lastly, here's Michele's article on What the Hell Happened to Hedge Funds? Excerpt:

Paulson and Einhorn belong to a secretive, exclusive club known as hedge funds, which count wealthy individuals, university endowments, sovereign wealth funds and public pension funds among the clients who have lusted after a piece of the wealth and are willing to pay exorbitant fees—typically a management fee of 2 percent of the assets and a performance fee of 20 percent of the gains—for the privilege of belonging.

Their riches made hedge funders, many of them math geeks who'd applied their skills to finance, glamorous. They bought Picassos and Matisses and had museum wings named after themselves. Page Six gossiped about their multimillion-dollar divorces. Their firms' inner workings were the inspiration for the hit Showtime series Billions, which wonders whether the bad guys are the hedge fund billionaires or the government prosecutors. They had their own tribal gatherings, like SALT, a Las Vegas hedge fund confab and brainchild of hedge fund impresario Anthony Scaramucci, the founder of investment firm SkyBridge Capital. SALT brought together thousands of investors and aspiring hedge funders hoping to mingle with the select few. Former heads of state, movie stars and hedge fund honchos could be found hobnobbing at the gaming tables and drinking Manhattans inside poolside cabanas at the Bellagio every May.

Hedge funds were sexy. But almost as soon as they became widely popular, something seemingly inexplicable happened: They quit making money—at least not as much money as you could make by simply matching market returns. The years of mouthwatering double-digit returns—SAC Capital Advisors had boasted a 30 percent annualized gain even after taking a huge cut for itself—ground to a halt. Between January 2009 and the end of last year, hedge funds returned an average annualized 6.09 percent, according to Hedge Fund Research (HFR), a data provider. That's less than half that of the S&P 500, which rose 15.82 percent annually during that time. You could put your money in Vanguard's Total Stock Market Index Fund, pay expenses of 14 basis points and absolutely crush the returns of John Paulson, David Einhorn, Bill Ackman and many other brand-name hedge funders.

6. If you're interested in learning more about short selling, I highly recommend our Advanced Seminar on Short Selling, which is now available for the first time (and only for a short time) on video for only $495 – register here. In it, we cover:

Our history on the short side
Arguments for and against shorting
Don't get sucked in for the wrong reasons
Charlie Munger's advice to me
How to mitigate risk in a bull market
"Guerilla shorting"
The three types of shorts we've been unsuccessful with
The one type of short in which we've been successful
How to find collapsing earnings
Being too smart can be painful
Look for obvious bubbles
Avoid valuation shorts – and never short accelerating growth
Don't use options
Sources of good short ideas
Case studies: The bursting of the housing bubble, Lumber Liquidators, Tesla, Plus 500, Wingstop, K12, Zillow

The 10-hour series includes seven teaching modules, totaling 6½ hours, one guest speaker (Mark Spiegel on Tesla), one student presentation (on Zillow), and 13 answers to questions.

To give you an idea of what we're teaching, we've made available for free the introduction/overview/agenda video as well as an excerpt from the first teaching module – to watch them, simply click the "Register here" link above.

We want to make our programs affordable to young investors and students, so are offering a 25% discount to anyone under age 30 and a 50% discount to any full-time student. To take advantage of this, simply take a picture of your drivers license (or anything else that has your date of birth on it) or your student ID, email it to me, and I'll send you a discount code you can use.

Please email me as soon as you register and I'll send you the link to a folder with all of the slides we teach from plus plenty of background materials.