SAN FRANCISCO (MarketWatch) — Scion Capital LLC, a $1 billion hedge fund firm run by Michael Burry, is shutting its Asian funds to focus on opportunities that will be created by a U.S. economic slowdown.
Scion’s Asian funds oversaw about $200 million in assets and returned between 80% and 116% since they started in early 2005. After the funds are closed, money will be returned to investors beginning at the end of the first quarter, Burry wrote in a recent letter to clients, a copy of which was obtained by MarketWatch.
The Asian funds aren’t being forced to close by client redemptions or other pressures, Burry noted. Investors can put the proceeds from the liquidation of the Asian funds into Scion’s main global funds, he added in the letter.
"The primary motivation for this move is that I foresee a significant opportunity to invest in dramatically undervalued distressed assets and out-of-favor businesses over the next several years," Burry wrote.
"The sheer magnitude of the troubles facing the leading companies in what is still the world’s largest and most significant economy cannot be missed," he explained. "The global credit bubble has burst, and the world has not yet learned the full impact."
Scion was one of the first hedge funds to spot problems in the subprime mortgage market in 2005. When the credit crisis erupted last year, Scion’s main Value funds generated returns of more than 130%, after fees, as bets against riskier parts of subprime mortgage-backed securities paid off. Since the funds started in 2000, they have more than quintupled. See related story.
Burry has closed most of those bets now. He has roughly $100 million worth of short positions, or bets against, subprime mortgages, down from a peak of $1.7 billion. Scion has also cuts bets against the creditworthiness of companies in the credit default swap market to a notional value of $800 million, from a peak of more than $6.7 billion in late 2006.
Scion’s main value fund is currently avoiding taking many big bets. Most of the portfolio is in short credit positions, cash, Japanese yen and Singapore dollars. It has very few U.S. equity holdings, four Korean stocks, one Chinese stock and one Taiwanese position, Burry wrote in another recent letter.
"With equities amounting to roughly one-third of assets, the Funds are awaiting not only the birth of opportunities, but the recognition of such opportunities by me," he wrote. "I patiently await a deepening of the U.S. recession and the string of bankruptcies that are sure to follow."
Scion will still focus mostly on equities. The firm may also invest in the debt of bankrupt and distressed companies, but mainly as a way to claim a stake in the future equity of the business, Burry explained.
Scion may take positions in futures contracts to bet more directly on certain commodities, Burry said. Rising wages in Asia are creating more demand from consumers, which will likely push commodities prices higher.
But commodity-related companies may not be the best way to benefit from this trend because they’ll be pressured by the rising cost of labor and borrowing, Burry explained.
Avoiding financial Armageddon
Burry expects a strong response to the housing crisis this year from federal and local governments and regulators, part of the reason he’s cut negative bets against mortgages and companies.
Companies’ equity can be endangered when investors become nervous about pressures on large asset bases. However, that can be remedied by a relatively small injection of additional equity, he noted.
"The capacity of the American government, sovereign investment funds and large global companies to do so remains prodigious," Burry wrote. "The pressure is immense in politicians, policymakers and corporate leaders globally to keep this from becoming a financial Armageddon."
"The form and nature of these interventions will have a significant influence on the fate of many short credit trades going forward," he explained. "The time had come to step back, and I am not currently looking to add to credit derivatives positions."
