Does the Sohn Conference Make Hedge-Fund Geniuses Stupid?
Yesterday, big-name investors, their fans and journalists (the latter two categories are not mutually exclusive) gathered at the Ira Sohn Conference in New York to hear some of the best ideas of the hedge-fund illuminati. Some speakers were old stalwarts with decades-long records of high returns, including former George Soros partner Stanley Druckenmiller, short-seller Jim Chanos and distressed debt maestro Paul Singer. But other managers were people who got seriously famous and seriously rich for only one reason: well-timed bets on the housing bust.
Bill Ackman, founder of Pershing Square Capital Management, took a huge short position against bond insurer MBIA; David Einhorn famously shorted Lehman Brothers and publicly called it out for disguising its massive real estate losses; and Kyle Bass only founded his firm, Hayman Capital, in 2006. He became one of the heroes of Michael Lewis’s crisis chronicle "The Big Short" and made billions for his well-timed and prescient bet on derivatives linked to mortgage-backed securities. All three spoke at Sohn yesterday.
Meawhile, John Paulson, who garnered more fame than any other fund manager for his bet against the housing market, spoke at another bash, the SALT conference in Las Vegas. (His question and answer session was closed to press.) Sohn attendees may be glad he was out of town: At last year's event, Paulson promoted the gold miner AngloGold Ashanti, which is down 40 percent since then. According to Bloomberg News, Paulson’s $500 million gold fund is down 47 percent this year; from the end of 2010, his Advantage Plus fund is down some 58 percent.
As Paulson's reputation has gone from wizardry to infamy, Ackman, Einhorn and Bass have also had their ups and downs. Ackman put a big bet on J.C. Penney after Apple Store guru Ron Johnson was brought in to turn the retailer around. Johnson resigned last month and Penney’s stock is down 37 percent since Ackman hyped it at last year’s Sohn conference. Einhorn made a big bet on Apple, which is down 16 percent in a year -- although he did successfully lead the charge to get the company to up its dividend and buybacks.
Bass yesterday gave yet another version of his "Japan is doomed" thesis. He said the “the beginning of the end has begun” and that inflation and skyrocketing debt costs will drive Japan into something like insolvency sometime in the next three years, causing the value of Japanese government bonds to plummet. He’s been making this pitch since late 2011, and since then yields on Japanese bonds have gone down -- 25 basis points on 10-year debt in the last 12 months -- despite a debt-to-gross-domestic-product ratio around 230 percent. There’s a reason going short Japanese debt is called the “widow-maker.” In January, Bass told CNBC that there would be an interest rate spike sometime in the next two years; in April he again told the network that “non-Japanese investors should borrow in yen and go buy productive assets in other countries that aren't as fiscally stretched." Yet the Nikkei has risen almost 60 percent in a year and the Yen has been stuck at around 99 to the dollar since early April (it only broke 100 today). Bass may be right in the next few years, but so far the Bank of Japan and investors have made him look foolish.
My point is not to knock Paulson, Bass or any other fund manager who hasn’t equalled the stellar returns of the financial crisis. Generating outsize profits consistently is very, very difficult. But it’s not a coincidence that these stars -- or at least their investors -- have fallen on rough(er) times recently. Basic statistics tells us that after a huge gain (or loss) there is likely to be some kind of regression to mean.
In his book "Thinking, Fast and Slow," the Nobel laureate Daniel Kahneman recounts his time working with flight instructors in the Israeli Air Force. One told Kahneman that whenever he praised his cadets for executing a complicated aerial maneuver, they would do worse the next time; but when he yelled at the cadets for messing up, they would improve. The instructor was confusing fluctuations driven by randomness with causality. The general wasn’t causing the pilots to do better or worse, even if it appeared so.
Something similar can be said with how we treat hedge-fund superstars. If you give most fund managers enough capital and enough time, they will get big gains and big losses. But all the focus is on those managers who have recently notched abnormally high returns. We pay attention to their investing ideas just when they are most likely to fall short of their past results. The Israeli flight instructors would say that the Ira Sohn Conference causes hedge fund managers to do poorly -- a Financial Times analysis found that the top ideas from last year’s conference underperformed the U.S. stock market. But it has nothing to do with the conference.
The best time to have paid attention to Paulson, Bass, Einhorn, Ackman and the rest was before the housing collapse, before Lehman went under, not after. But if we had known to do that back then, we probably wouldn’t need to go to a conference to get investment ideas today.
(Matthew Zeitlin is a contributor to the Ticker. Follow him on Twitter.)