Blowups In Hedge Fund Hotels

During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Blowups In Hedge Fund Hotels. Here’s an excerpt from the discussion:

Tobias Carlisle:
Well, let’s do the next topic because we’re about a third away through. Do you want to jump on it, Bill?

Bill Brewster:
Yeah. I had hinted at it already with TransDigm. It was just like I think Wednesday, I watching the tickers that our hedge fund hotels. Formula one, Liberty …

Tobias Carlisle:
FOK.

Bill Brewster:
Yeah, Liberty SiriusXM, that discount blew out, just like a bunch of stuff that TransDigm was a compounder until people got scared and then they bailed on it. I think that it’s a combination of probably redemptions and maybe a little bit of a leverage and a little bit of put selling all coming together at the same time to just … I mean, some of the drawdowns in those names. Like LSXMA has always traded at a discount to what theoretically it should have, but the discount recently has really blown out. That’s when I had said like, I think that there’s a lot of evidence of pain going on. The Energy MLP space I follow because of Kyler Hasson and then I got involved in Energy FinTwit.

Tobias Carlisle:
Good account.

Bill Brewster:
That’s hilarious.

Tobias Carlisle:
Energy FinTwit is hilarious. It’s worth going having a look. Definitely don’t make any comments because you’ll just be roasted.

Jake Taylor:
Word blows.

Bill Brewster:
Yeah, you’re going to get killed. You deserve it. Those guys are like the oh geez of energy.

Tobias Carlisle:
The apt.

Bill Brewster:
Like Mrs. Skilling had …

Tobias Carlisle:
Yeah, that’s a right account.

Bill Brewster:
Like a tweet with four closed end funds that basically just looked like liquidation phases. If you look at the MLPs on that day, they all just got slaughtered. It was interesting to watch a lot of the tape. I guess one interesting takeaway as I was listening to old Buffett stuff yesterday. He was talking about the SMP puts that he sold, because he understands structuring. He sold the European options. The American options, you can put them at any time and that stuff …

Bill Brewster:
… feels good in a bull market, but it can hurt when all correlations go to one.

Tobias Carlisle:
What are the standard ones that are traded over the … Not over the counter, the ones that are traded, they expire on a date. That’s the American style.

Bill Brewster:
Yeah, but you can be put them at any time. You always have to worry about rolling them, whether or not somebody is going to exercise on you. On thinkorswim, for instance, the account that I use, it’s all American style. I can’t sell a put and wait until expiration. I have to worry every day that somebody is going to put it to me, which is why I always buy a put under the put I sell, try to manage my risk. Although my recent history on Tesla has just suggested to me that I should just avoid the game completely because …

Tobias Carlisle:
I rolled out of Tesla. The computer says no. I was out of that one. The funny thing is for this quarter, even though it’s like a complete chitchat in face-ripping rally, it actually ended up making money throughout the end of the quarter. It’s one of the weirdest things I’ve ever seen. Definitely not worth it for the … The risk reward was all wrong there. When you talk about Hedge Fund Hotels, because Zero Hedge rest in peace tip one out for Zero Hedge and now you can’t even click on a link on Twitter to get through to Zero Hedge without getting a warning. They used to have this.

Tobias Carlisle:
They used to publish this pretty regularly where they said here are the concentrated hedge fund holdings and they were all likely to underperform. How are you determining that something is a hedge fund hotel? Are you doing that quantitatively or you just know that there’s a whole other [inaudible 00:27:12]?

Bill Brewster:
No. I just watch. I mean, charters the hedge fund hotel. You do the 13Fs and you can see where they’re bunched. I do think a lot of the times, they are hedge fund hotels for a reason. These aren’t a bunch of dumb guys making a choice or some stupid decision to pump something. At least, I don’t think so in charters case it’s something I know about. You got to be willing to live through some serious vow when stuff happens, because there are situations when they’re all just liquidating. You got to be able to take that drawdown and know what you own to not take your response from the price action. You’ve got to be able to be like, no, this is fine. It’s just what’s going to happen in this name.

Jake Taylor:
Think about it, if this was a private business and those were your other business partners, it’s an interesting way to imagine like, oh, okay, that’s who I’m in business with right now.

Bill Brewster:
Yeah. I’d be okay with it if there are hot money and they just get secured. I’d be like, all right, I’ll buy your shares and whatever.

Jake Taylor:
Well, that maybe is the right answer.

Tobias Carlisle:
There used to be some pretty good research that those kind of concentrated holdings underperformed. It was one of the things that I always wanted to look out for. Because for so on the short side, that’s also the case where there’s shorter smart. There’s this kind of meme. I see it on Twitter all the time, meme, meme, that’s my accent. There’s this thing on Twitter all the time where people like, oh, there’s a whole lot of short interest in this thing. If you buy it, you’re going to get this explosive move to the upside. That’s not right. Shorter smart, shorter in stuff. They typically go down.

Tobias Carlisle:
Lots of research out there on that, wrote about a few of the papers in quantitative value. The thing you have to be careful of as a short is being in something that’s too heavily shorted, because then you become subject to the whims of the other shorts in it. The borrow gets very expensive, becomes hard to make money. It’s a pretty good signal for a long as this concentration, hedge fund concentration. Hedge fund just sort of everybody, they must all know each other, go and talk to each other on Twitter or whatever, get concentration of the same thing without doing their own research. It’s not a great signal for the most part.

Bill Brewster:
Well, like charter, when I got into it, was when they had that integration issue. People sold that thing like crazy. I don’t have any data to support this. I think when there are hiccups in those names, people just liquidate them abnormally more than maybe some other things. Maybe I’m wrong.

Tobias Carlisle:
Do we know of any blow ups? Does anybody listening at home know of any blow ups? I’ve heard of a few, but they were stuff I’ve never heard off before.

Jake Taylor:
I never heard of a company … Yeah. No name [crosstalk 00:29:55].

Bill Brewster:
There have to be.

Tobias Carlisle:
There was one I heard that blew up, but it was one of those ones where everybody can trade their own book. There’s no single person calling the shots. That makes me super nervous whenever I hear something like that. You just got some guy that they’re selling, puts into the market and, “Hey, we blew up the whole fund, sorry about that.”

Bill Brewster:
Well, Modest Proposal when MVR was trading like crazy. He put out something that I think was English, but also might have been gibberish. It turns out that it was English.

Tobias Carlisle:
What did he say?

Bill Brewster:
It was some pod shop had blown up. He wrote a sentence that I didn’t understand anything, but he was completely right. He was like, something in the market is messed up, somebody is …

Tobias Carlisle:
Liquidating.

Bill Brewster:
… blowing out right now, and it was.

Tobias Carlisle:
Well, to what do you attribute the big run-up today?

Bill Brewster:
Probably short covering.

Tobias Carlisle:
It’s also rebalancing.

Jake Taylor:
Stemy.

Tobias Carlisle:
It’s end of month. The Stemy.

Jake Taylor:
When did the Stemy?

Tobias Carlisle:
It’s been Stemy all the way through this day.

Jake Taylor:
Yeah, there’s a lot of Stemy on the come.

Tobias Carlisle:
When do we get our $1000 or $2000? When does that come through?

Bill Brewster:
You’re phased out if …

Jake Taylor:
You got to pay it back. Apparently, is that the right … I don’t know. It’s hard to keep on all of this stuff.

Tobias Carlisle:
It’s Stemy.

Jake Taylor:
It’s almost not even worth it.

Tobias Carlisle:
I want to know where I go if I’m going to buy that.

Bill Brewster:
Some of the Stemy you got pay back, for sure, but three years. You have …

Tobias Carlisle:
Zero interest rate Stemy and zero interest rate line, I’ll take it. I’ll take a swing at Berkshire.

Jake Taylor:
Yeah, I want that. I want to get in the fed window type of planning.

Tobias Carlisle:
Get $100 million and pounded on Berkshire leaps. If you can’t pay it back, so what?

Jake Taylor:
Not my problem. Yeah. Well, you just described the hedge fund.

Tobias Carlisle:
Yeah, that’s exactly right. I just described a big bank, honestly.

Jake Taylor:
Yeah, pretty much.

Tobias Carlisle:
They shouldn’t be able to. You can’t have both. You can’t have proprietary trading and be able to access all of that free money. Because otherwise, it doesn’t take long, either consciously or unconsciously for them to put together the idea that you can just go on, should as much as you possibly want into the market. If heads all win tails, that’s a great trade.

Jake Taylor:
Shouldn’t really surprise anybody at this point, right?

Tobias Carlisle:
We just got monetized. It was a Super Chat. I don’t even know what that is. Thanks, Jason. Appreciate it.

Bill Brewster:
Sweet.

Jake Taylor:
What?

Tobias Carlisle:
He just paid us for YouTube’s non-monetization because I’m about to say coronavirus. It’s six bucks.

Bill Brewster:
There it goes. Feed the family, man. You can’t say coronavirus out here.

Tobias Carlisle:
How’s everybody going at home? Tell us how you’re doing. If anybody’s going nuts or anybody’s finding something interesting, we’re interested in it.

Bill Brewster:
Do you see the picture of the baking soda on the floor of my house the other day?

Tobias Carlisle:
I saw one of your boys’ rooms.

Bill Brewster:
Dude, these little fuckers, they took baking soda and poured it all over the house, all over.

Tobias Carlisle:
Oh my God.

Bill Brewster:
I walked outside, my wood floors were white.

Tobias Carlisle:
Oh my God.

Bill Brewster:
That’s not easy to clean up.

Jake Taylor:
No. Just add vinegar. I told you, it’ll just boil up. It’s a science experiment.

Tobias Carlisle:
That’s also a cure for coronavirus.

Jake Taylor:
Yeah.

Bill Brewster:
I love them, but they’re testing right now.

Jake Taylor:
We were joking about starting the podcast off saying bad words and I was like I was going to make an observation that in our household, there’s probably been more swearing in the last two weeks than the two years before that. Everyone’s just a little bit on edge. It doesn’t take much to tip over to where daddy’s dropping things …

Tobias Carlisle:
Definitely.

Jake Taylor:
… he wouldn’t normally say.

Bill Brewster:
Yeah, still four to five weeks. We’ll see how we’re all doing at the end of it. Might have a battle royale.

Tobias Carlisle:
My little fellow, my two-year-old, likes to walk around saying if and nay, nay. We’ve persuaded him that what he should actually be saying is peanut butter. Now he tells everybody that peanut butter. It’s pretty funny. This is devolving. Let’s move on to another finance related topic, I guess months up.

Jake Taylor:
Toby, you’re up.

Bill Brewster:
Oh, peanut butter.

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