Every Cloud........

When I traded commodities an old boss used to harp on about how volatility is 'our friend' and flat markets 'the enemy'. He also said that in volatile markets 'don't cry for the losers, short them'.

This has been good advice and in the last few months, some of the losers are big names in the industry but they have been royally battered by others. One of those doing the battering is Michael Burry, head of the $621mn fund Scion Capital, he has informed investors that their massive short of the subprime market is being unwound after generating a four-fold return.

"The opportunity in 2005 and 2006 to short subprime mortgages was an historic one," Burry wrote in a letter to investors. "With continued hard work and a bit of luck, we will latch onto another opportunity like the subprime short. But I am not counting on it happening anytime soon."

Scion Capital held $1.7 billion worth of short positions on parts of subprime mortgage securities, but by mid-October, those short positions had been whittled down to $479 million, according to a letter that Burry sent to investors this month.

Having being unwinding the positions from July through October the bet has so far generated four times the original value of the trade giving investors between 78% and 85% gains in the first nine months of the year.

Since their inception in late 2000, the funds have surged more than 300%. During that time, the Standard & Poor's 500 Index gained less than 10%.

Scion's Burry said in his October letter that it was time to "reset expectations," noting that the firm's returns have been "clearly outsized and far from normal."

"Twenty percent annual returns are my rough goal, and I feel that is a properly lofty goal," he wrote. "That is, it is not so high as to encourage excessive risk-taking."
Some of that caution may reflect lessons Burry learned in 2006.

That year, Scion's global strategy funds, the firm's main investment portfolio, lost more than 16%. Burry had placed an early bet that the credit markets would deteriorate, but his strategy was too early in the view of some of his investors, and he was forced to withdraw their money well before the subprime debacle took shape.

"The pain was certainly intolerable for some of our investors, and some that were very close to me capitulated at the very bottom," Burry recalled.

I suspect those that stayed in have forgiven Mr Burry and put him firmly back on thier Christmas card list...