Author Topic: Chanos Nice Interview  (Read 14042 times)

Packer16

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Re: Chanos Nice Interview
« Reply #20 on: December 09, 2013, 05:34:20 PM »
Long-term short selling only is like investing in phone directory firms or paging firms.  You may be able to do better than the decline rates they experience due to changes in valuation but LT your performance will follow the economics - down.  How would you rate a paging or phone directory investor?  I would compare him to the other alternatives (the S&P 500) and he would do poorly but may do well if I compare him to paging or directory decline rates.  I think Chanos should be compared to all the alternatives available not just shorts. 

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mcliu

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Re: Chanos Nice Interview
« Reply #21 on: December 09, 2013, 07:46:11 PM »
Very interesting discussion!

I think the problem is that you can't really spend "alpha" in Chanos' sense. Even though a portfolio incorporating Chanos' fund will have a higher Sharpe, you'll still be worse off in $ terms if you're invested without his fund. I guess it comes down to whether you believe portfolio volatility is a measure of risk.

RichardGibbons

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Re: Chanos Nice Interview
« Reply #22 on: December 09, 2013, 09:57:06 PM »
Very interesting discussion!

I think the problem is that you can't really spend "alpha" in Chanos' sense. Even though a portfolio incorporating Chanos' fund will have a higher Sharpe, you'll still be worse off in $ terms if you're invested without his fund. I guess it comes down to whether you believe portfolio volatility is a measure of risk.

This is not necessarily true, because of rebalancing.  The performance of a combined performance that is rebalanced periodically can exceed the performance of the individual components.

e.g. Suppose that you have two investments, and you put $100 in each.  Investment A falls 50%.  Investment B goes up 50%.  You'd still have $200.  Supposed you then rebalance, putting $100 in to A, and $100 into B.  If A then doubles, and B falls 33%, then both investments are back where they started.  Someone who had just bought and held each investment would have a 0% return.

However, because of the rebalancing, your investment in A is now worth $200, and your investment in B is now worth $66.  Your return of 33% is better than either investment A or investment B.

skanjete

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Re: Chanos Nice Interview
« Reply #23 on: December 10, 2013, 02:28:10 AM »
In my view Chanos fund has to be considered as a service, not an investment. There is a market demand for short exposure, and he provides that service. That's all there is to it. He has carved out a niche in the fund management business and his service has a good reputation.

I would be very supprised if he invested all his personal net worth in short investing. But that wouldn't be contradictory, because Chanos is not really investing and aiming the highest possible absolute return, he is providing a service, fulfilling a market demand. And he's good at it.
Actually, if he would invest his personal net worth into long situations only, that would be a perfect hedge with his fund activities.


 

longinvestor

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Re: Chanos Nice Interview
« Reply #24 on: December 10, 2013, 05:36:13 AM »
I was being serious. Take off your warren buffett hat and put on your institutional investor (pension, foundation, endowment) hat for a short bit. 
By no means do i worship at the altar of academic finance, but the reality is that overall portfolio volatility does matter to institutions and for good reason; they have annual withdrawals in order...

So, this is all about being a better lemming? Twenty years is a long time for everyone to be wrong because they all read the wrong book and now we want to add to the wrong book collection. Swell!

thepupil

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Re: Chanos Nice Interview
« Reply #25 on: December 10, 2013, 05:44:38 AM »
Very interesting discussion!

I think the problem is that you can't really spend "alpha" in Chanos' sense. Even though a portfolio incorporating Chanos' fund will have a higher Sharpe, you'll still be worse off in $ terms if you're invested without his fund. I guess it comes down to whether you believe portfolio volatility is a measure of risk.

This is not necessarily true, because of rebalancing.  The performance of a combined performance that is rebalanced periodically can exceed the performance of the individual components.

e.g. Suppose that you have two investments, and you put $100 in each.  Investment A falls 50%.  Investment B goes up 50%.  You'd still have $200.  Supposed you then rebalance, putting $100 in to A, and $100 into B.  If A then doubles, and B falls 33%, then both investments are back where they started.  Someone who had just bought and held each investment would have a 0% return.

However, because of the rebalancing, your investment in A is now worth $200, and your investment in B is now worth $66.  Your return of 33% is better than either investment A or investment B.
Thank you Richard! That's part of my point.

I said I wouldn't continue arguing but I can't resist. It really bothers me when someone's excellent track record is dismissed out of context. A 20 year track record, like that is an accomplishment deserving of respect.

Saying Chanos adds no value is like saying Ajit Jain or Berkshire's insurance operations add no value because they don't make a high absolute returns when viewed in isolation. The insurance operations provide capital at a negative cost to Berkshire, just like a short book that can squeeze out positive absolute returns and high alpha provides capital to a portfolio or a hedge fund.  I am not arguing that short selling in aggregate is not a negative return proposition. It absolutely is! Thankfully, the long term trend in prosperity and corporate profits is constantly providing a headwind to shortsellers.

But the idea that Chanos returns are not spectacular ignores the potential of combining that return stream and the capital it provides with more lucrative activities. Remember, short selling provides cash, rather than consumes it.  If you put 100% of your money into SPY (better yet, 100% in managers that can outperform on the long side) and some percentage allocation to Chanos and his fellow short sellers, you'd be better off in terms of volatility AND $ actual money made because Chanos eked out a positive return. This is true even ignoring the potential for "strategic" or "tactical" rebalancing based on market valuations, mean reversion, or whatever. I'm sure I'll get hated on for that last one, or maybe compared to Whitney Tilson, or make Parsad gag again : )

Now the argument can be made that you are taking on more risk by running gross exposure over 100%, or that short selling is an inferior form of leverage because of its strange risks (forced buy-ins, squeezes, recourse, Volkswagen October 2008, etc. ),  or that you shouldn't care about volatility, or that finding the Chanos's of the world is incredibly difficult (it is!) or that cash is an asset class and a better hedge for those who care about volatility.

But those arguments are beyond the scope of the questions at hand, which in my view are 1) is chanos a good short seller? 2) does he provide value to those who hired him?

No evidence has been provided to refute the fact that Chanos made money when the passive alternative lost 900%. No evidence has been provided that Chanos returns are not spectacular when compared to hedge funds' short books or other dedicated shortsellers. I'm not saying people should be satisfied with 2% annualized or that one should put an undue amount of capital in a very low-return strategy.

But to me it is indisputable that Chanos has done an amazing job.

thepupil

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Re: Chanos Nice Interview
« Reply #26 on: December 10, 2013, 05:53:32 AM »
I was being serious. Take off your warren buffett hat and put on your institutional investor (pension, foundation, endowment) hat for a short bit. 
By no means do i worship at the altar of academic finance, but the reality is that overall portfolio volatility does matter to institutions and for good reason; they have annual withdrawals in order...

So, this is all about being a better lemming? Twenty years is a long time for everyone to be wrong because they all read the wrong book and now we want to add to the wrong book collection. Swell!

No, it's not about being a better lemming. It's about not being a lemming and thinking for oneself about the very interesting potential of someone who can consistently identify stocks that materially underperform the market, about the potential of someone that can provide capital (either within a fund, or if done through a separate account platform, within a portfolio of other managers) at a negative cost. Am I the lemming? Or are you?

Am I seriously the only one here impressed by that track record and think that it has some function, that finding 10 Chanos's would be a worthwhile activity?

bmichaud

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Re: Chanos Nice Interview
« Reply #27 on: December 10, 2013, 06:16:07 AM »
I was being serious. Take off your warren buffett hat and put on your institutional investor (pension, foundation, endowment) hat for a short bit. 
By no means do i worship at the altar of academic finance, but the reality is that overall portfolio volatility does matter to institutions and for good reason; they have annual withdrawals in order...

So, this is all about being a better lemming? Twenty years is a long time for everyone to be wrong because they all read the wrong book and now we want to add to the wrong book collection. Swell!

No, it's not about being a better lemming. It's about not being a lemming and thinking for oneself about the very interesting potential of someone who can consistently identify stocks that materially underperform the market, about the potential of someone that can provide capital (either within a fund, or if done through a separate account platform, within a portfolio of other managers) at a negative cost. Am I the lemming? Or are you?

Am I seriously the only one here impressed by that track record and think that it has some function, that finding 10 Chanos's would be a worthwhile activity?

No you are not the only one. It's ABSURD to say that Chanos does not add value. +2.1% over 20 years versus +12.7% for the market? That's 14.8% alpha.

Sanjeev compares his performance to the market and other participants. This is no different - Chanos just happens to short. Yes he is not morally all there - is Buffett? Chanos was part of the short attack on Prem was he not? Hence the animosity toward him.....

Think of it this way....Baupost hedged significantly leading up to the 2000 bubble peak. Not sure what the exact numbers were, but I am pretty sure he hedged using index puts etc....Doing so would have generated the following losses on that hedge:

1996: -23%
1997: -33%
1998: -29%
1999: -21%

Compound that all together and you lost 72% of your original hedge position.

Now compare to Chanos:

1996: -14%
1997: +5.4%
1998: -1.3%
1999: -.8%

Compounded together, your hedge position via Chanos' fund lost 11% cumulatively. HOW IS THAT NOT VALUABLE ALPHA IF YOU ARE LOOKING TO HEDGE THE MARKET?

Ok so now let's look at how the market hedge would have performed when needed, i.e. in the 2000 and 2002 downturns....

Market:

2000: 9.2%
2001: 11.9%
2002: 22.2%

Compound those three returns with the returns from above, and your original $100 market hedge position initiated in 1996 is now worth $43. CONGRATULATIONS.

Now Chanos:

2000: 47.4%
2001: 18.2%
2002: 35.4%

Compound those with the returns from above.....and your $100 hedge position from 1996 is now worth $209.


This is not even a debate. If Chanos' fund is looked at as a market hedging tool, then like with a market hedge you want to utilize it when the risk reward is best. You would not employ Chanos at the 2002 and 2009 market bottoms. Would you utilize him now? HECK YES. Why?

1. Because even if the market continues to move up, he has proven to add significant short alpha when the market is going up, thus you will not have your market hedge decimated like you would have from 1996-2000, and...

2. He adds SIGNIFICANT alpha in actual market downturns b/c most of the time the crappiest companies will get crushed in a downturn.


Again, zero debate here.
« Last Edit: December 10, 2013, 06:18:42 AM by bmichaud »

merkhet

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Re: Chanos Nice Interview
« Reply #28 on: December 10, 2013, 06:40:33 AM »


No, it's not about being a better lemming.


Again, zero debate here.


I too find that the best way to keep yourself from becoming a lemming is to engage in no debate. :P

I believe this is an argument that will not be resolved between the two sides. I think it'd be useful to consider the opportunity cost of shorting -- being up 50% on X% of your portfolio in a year where the rest of your portfolio is down 50% is only useful in so far as the redeployed capital can then capture the lost opportunity cost of not having invested your X% of the portfolio at a compound rate commensurate with the (1-X)% of your portfolio. Otherwise, it's probably a really expensive alternative to the pepto bismol I can purchase from CVS to deal with volatility.

Example:

Split your portfolio 50-50.

Market: 15% per year

Long: 25.89% per year for 10 years (10x return)
Short: 0% per year for 10 years (the pupil & bmichaud might consider this significant alpha)

In the 11th year, 50% correction to the market and the long portfolio so it's merely a 5x return or a 15.75% return per annum.  Better hope the short portion (up 50% in the 11th year) of the portfolio can create a 3.33x bagger just to break even with the opportunity cost.

So I'd say the answer is "it depends" rather than "there's no debate."
« Last Edit: December 10, 2013, 06:55:04 AM by merkhet »

AZ_Value

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Re: Chanos Nice Interview
« Reply #29 on: December 10, 2013, 06:49:44 AM »
Haha. I think someone needs to defend thepupil here because his points are more than valid in my opinion.

The fact is that not everybody is made equal, and like it or not, some managers out there prefer a smooth 12% performance to a lumpy 15% and if it helps them sleep at night and/or keep their job who am I to judge them?

I personally don't subscribe to that but I also think us value investors way too often have a "holier than thou" attitude towards everybody else because we know our way is probably the most logical in the long term, even though we know from the start that the majority of investors don't have the discipline it takes to be a value investor.

And when you look at it from that standpoint, the numbers in the document posted by Sanjeev speak for themselves.
Out of the 19 full years provided, the S&P had 4 down years (down -11.6% on average), the short fund URSUS was up 42.9% on average.
For the 15 up years for the S&P it was up an impressive 20.3% on average across those years and URSUS was only down -2.4% on average.

This is quite valuable for managers who care about mitigating the pain of down years. very valuable.
And over the whole period to have a short only fund have 2% CAGR while the index is roaring at 13% is quite impressive. All you have to do is look at how painful the Fairfax short book has been in the recent years of market advance and you'll know how difficult this is.

Now I can't cast a judgement on Chanos as a man or his moral character which seems to be part of the issue here, but as always, numbers don't lie.