Michael Burry: Life, Career, Scion Asset Management LLC, Subprime Crisis

 "Ick Investing means taking a special analytical interest in stocks that inspire a first reaction of 'ick'. I tend to become interested in stocks that by their very names of circumstances inspire unwillingness—and an 'ick' accompanied by a wrinkle of the nose on the part of most investors to delve any further."

-       Michael Burry

Not many would dare transition from Medicine to Finance, but not Michael Burry, one of America’s finest multi-millionaires with a net worth of $300 million. He is the founder of Scion Capital, LLC, a hedge fund company which successfully ran for 8 years (2000-2008), and Scion Asset Management, an investment company. Part of his fame and success is linked to the Subprime mortgage crisis which had to do with shorting mortgage securities ahead of the meltdown.

Early life and Education

Born in 1971, Burry spent the early years of his life in San Jose, California. At an early age of two, Burry lost one of his eyes to cancer only to be replaced with an artificial eye. Having a keen interest in finance, Burry went on to study Economics and Pre-med at the University of California and proceeded to get an M.D. from the Vanderbilt University School of Medicine. As a physician by profession, when he wasn't working at the hospital, he focused on financial investing.

Early Career

After spending quite some time at the Stanford hospital, Burry eventually quit his career as a Physician and started his first investment company, Scion Capital LLC. He started his new company by taking up loans and using some of his available property. By the end of 2004, Scion Capital successfully recorded a $600 million in revenue. As a new investor with some knowledge of how investments work, he created his blog where he used it as a means of analyzing the stock market based on his perception of it. He eventually started gaining recognition by some top-notch fund managers, and Morgan Stanley, an investment bank. He spent time analyzing companies that had been overvalued on the internet but in reality, their value wasn't good enough. By shorting such stocks his hedge fund escalated in turn.

By the first year of starting his business, Scion Capital recorded a return of 55% in spite of the S&P falling to 12%. Though the market continually fell within the next two years, Scion Capital still returned 16% and 50% respectively thereby making the company one of the best in the industry. Between 2000 and 2008, Scion Capital recorded a total return of 489.33% with a revenue peak of $1 billion. As a fund manager, Burry had to deal with people, but he was later diagnosed with Asperger Syndrome which made him get uncomfortable around people. He then resulted in communicating with investors through letters while still managing their investments. This health disorder led to poor relations between Burry and his investors to the extent that some investors refused to work with him again. His poor relationship with his investors eventually led to a collapse of Scion Capital as his fundraisings were no longer successful. Burry eventually liquidated his credit default swap short positions in April 2008 but didn't benefit from the bailouts of 2008-09. In spite of liquidating his assets, Burry continued to invest and was successful at it, thereby, developing his reputation as an investor. His unfailing ability to predict the market gave him an added advantage in investment.

Scion Asset Management, LLC

Burry made a good back with the Scion Asset Management LLC in 2013. He was able to raise about $200 million from investors which he used to kick off the new business. This rebranded Scion investment firm does not manage individual investments with a total of 6 clients.  Its clients are an insurance company (separately managed account) and five private investment funds which include Scion Master G7, L.P.; Scion G7, L.P; Scion G7 Offshore, Ltd; Scion Value G7, L.P, and Scion Asia, L.P. The private investment funds are based in the Cayman Islands or Delaware. Other acceptable private investment investors may also include trusts, foundations, family offices, High-net-worth individuals a fund of hedge funds, pension plans and endowments, charitable organizations, corporations, and businesses. For a separately managed account, the firm doesn't require a minimum investment compared to a private investment fund. The Scion G7, Scion G7 Offshore funds, and Scion Asia fund requires at least a $1 million investment amount while the least investment amount for the Scion Value G7 fund is $500,000.  Scion still maintains the leverage to make the minimum investment amount flexible for its accredited investors.

Subprime Mortgage Crisis

The subprime mortgage crisis and collapse was as a result of commercial banks selling too many mortgages to meet the increasing demand for mortgage-backed securities which were sold via a secondary market. The home prices first fell in 2006 which had a lot of risks attached to it; the risks expanded to mutual funds, pension funds, and other corporations directly involved. In 2007, a banking crisis broke out, and by 2008 the American economy experienced its worst financial meltdown since the Great Depression. A few investors and influencers including Warren Buffet began predicting the housing crisis as early as 2003. Others got on board, including Burry who predicted the lurking mortgage crisis. He perceived the meltdown by analyzing mortgage lending prices between 2003 and 2004 and predicted that the ‘bubble’ would burst by 2007. Based on his knowledge of residential real estate he knew that the subprime mortgages were bound to lose value by the time the original rates change. The Subprime mortgage deal was Burry’s ticket to fame and success as he predicted the 2008 housing meltdown. He made millions by betting against Subprime-mortgage. He bought credit default swaps worth hundreds of million dollars against subprime deals that he perceived to be threats. As the value of the bonds dropped, the value of the credit default swaps would increase. As he suspected, things turned out to work in his favor.

 

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