A notorious short-seller whose firm oversees $644 million unpacks his successful bet against Credit Suisse ahead of the Archegos meltdown — and says investors could see 15 or more similar fund blow-ups

  • Credit Suisse has been a lender to two major blow-ups in recent months, Greensill and Archegos.
  • Hedge fund manager and short seller John Hempton explains his Credit Suisse short position on a podcast.
  • And shares why investors could see more Archegos-style implosions.
  • See more stories on Insider’s business page.

Until the blow-up of London-based Greensill Capital, asset manager John Hempton wasn’t having a good few months.

“I short nonsense stocks and shorting nonsense stocks gave me the worst three or four months of my career in the lead up over the Christmas period, and then has suddenly become exceedingly nice,” Hempton told Bloomberg’s “Odd Lots” podcast on April 19.

The Australian hedge fund manager, whose firm has around $644 million assets under management, sat down with Bloomberg editors Tracy Alloway and Joe Weisenthal on the podcast to discuss his shorting of Credit Suisse based on its financing to Greensill and the current bull market.

“We’re making money on both sides of the book at the moment, we’re making money on longs, because we’re long ordinary stocks in the markets making new highs and we’re making money on shorts cause the nonsense stocks have been blazing,” Hempton said on the podcast. “And I don’t know how long this will last, but it’s extremely pleasant, having been extremely unpleasant.”

Shorting Credit Suisse

One of Hempton’s big bets was shorting Swiss bank Credit Suisse over its role in lending to Greensill Capital, a supply chain financier that was domiciled in Australia, but operated in London.

Short selling is when an investor borrows a security that they then sell with the expectation that the price will drop and they will be able to buy it back later more cheaply and pocket the difference.

Hempton recognized supply-chain financing was a shrinking business. Yet, Greensill was still securing significant amounts of money from big name players in loans, such as Credit Suisse and Softbank.

Greensill ended up becoming a lender of last-resort to many sketchy creditors, Hempton said in his March partner letter,  and was undertaking significant risk-taking, which eventually resulted in bankruptcy in March and major losses for Credit Suisse.

“I am short Credit Suisse, but I was short Credit Suisse in fairly big quantity in the past,” Hempton said on the podcast. “I’m now short Credit Suisse in very small quantities. You can probably think of me as a Credit Suisse buyer to cover.”

During the podcast, Alloway highlights that Bloomberg asked Credit Suisse for a comment on Hempton’s short position and it declined to do so.

“The real problem is that this bank is a shadow of its former self, its revenue opportunities have disappeared,” Hempton said.

He expects more evidence of fraud to emerge at companies that have been lent money by big banks that can then profit from those loans.

“I’m actually chasing down, and I’m not going to name, another very big European fraud, where we think that Credit Suisse is going to have in the low 10 figures of losses, something in the billion range,” Hempton said.

And then, there was Archegos

Despite spotting the problems at Greensill, Hempton did not see Archegos coming.

“It didn’t surprise me that the lender that lost the money [in Archegos] was Credit Suisse,” Hempton said. ” … Now, we got lucky, because we didn’t know that Archegos was going to happen. But we did know that we looked in several places and we found sh— knee deep at Credit Suisse. And if we can find cockroaches, there are probably a few more.”

Archegos Capital was the family office of Bill Hwang, a former protégé of Tiger Capital’s Julian Robertson, a legend of the hedge fund industry. Hwang managed a concentrated portfolio of stocks and held highly leveraged positions.

When Hwang couldn’t make a margin call from various banks, his positions were liquidated and many of the counterparties, such as Credit Suisse and Morgan Stanley, had to sell off his holdings in large chunks at whatever price they could get. Credit Suisse reported a loss of $827 million for the first three months of the year on Thursday that stemmed from both those situations.

One of the aspects that caught Hempton’s attention was Hwang’s investments in “yesterday’s stocks”, such as ViacomCBS (VIAC).

“The idea that you can get you to blow yourself up buying a stock that is flat year to date on leverage is pretty astonishing,” Hempton said on the podcast. “And the only reason this was possible is that it went from $36 [at the start of January] to $39 via the princely sum of about $100. So  every time it went up, he must have bought more.”

Buying more of illiquid stocks is an old tool used in the fund management industry, Hempton said.

Managers can buy illiquid stocks, walk them up, buy more and then the performance looks great, Hempton said.

“Retail investors are often not very sophisticated, so money flows in and eventually you’re left as a giant bag holder full of illiquid stocks,” Hempton said. “And that can be done directly, or can be done accidentally, by a deluded fund manager.”

One example is the Neil Woodford scandal that happened in the UK, Hempton said.

More Archegos-style blow-ups to come…

Hempton doesn’t expect the blow-ups to stop at Archegos.

“The tide isn’t out at all, I mean, markets are at all-time highs and we’ve already seen people that are swimming naked, Hempton said. “It’s a bizarre market.”

However, when the market will turn from “unbridled euphoria” to “realism”, Hempton has no idea.

He would be the richest hedge fund manager in the world if he knew, Hempton said.

“There’s gonna be 15 or 20 Archegos out there, there’s going to be a bunch of really stupid stuff out there that blows up and we’re going to think, ‘How the hell were we that stupid?'” Hempton said.

It’s not possible to have a bull market at this scale and not have some people running around with no clothes on, Hempton said.

“It’s just the emperor is going to get exposed. I wish I knew who all were, I know who a few are, right?” Hempton said. “And the surprising number of times when I know who the Emperor wearing no clothes is, the lender to that Emperor is Credit Suisse.”

Source: Read Full Article