Michael Burry, money manager who in 2008 had correctly predicted the housing market collapse, is now betting 90% of his portfolio on a market downturn. Security Exchange Commission filings cited earlier this week, Burry is making his bearish bets against the S&P 500 and Nasdaq 100 at the end of the second quarter.
Burry's fund has bought put options with a notional value of $739 million against the popular Invesco QQQ Trust ETF during the quarter, and separate put options with a notional value of $886 million against the SPDR S&P 500 ETF.
This may act as a word of caution and also a tip for millions of investors across the globe who follow Burry since he forecasted the lending crisis and profited handsomely from the market downturn.
Who is Michael Burry and how he predicted 2008 housing market collapse?
Michael J. Burry started dabbling in financial investing while he was still studying medicine at Vanderbilt University School of Medicine in Tennessee. Soon, without finishing, he left school to start his hedge fund, which he called Scion Capital and the rest is history, a Finbold article cited.
In 2005, Michael Burry's attention shifted to the subprime market, where he astutely identified irregularities that would ultimately trigger the 2008 financial crisis. His meticulous analysis of mortgage lending practices and bank balance sheets revealed the inherent risks in the market, accurately foreseeing the impending collapse as early as 2007.
Burry's prescience lay in recognizing the danger posed by millions of low-income borrowers obtaining homes with substantial leverage, often without down payments, and unable to sustain their mortgages when interest rates rose. Despite the market's rosy valuation of these mortgages, Burry accurately predicted their unsustainable nature and the subsequent plummet in credit product values once higher interest rates replaced initial rates.
To capitalize on his foresight, Burry engaged in a daring strategy, convincing investment banks like Goldman Sachs to provide him with credit default swaps (CDS) against vulnerable subprime deals. This essentially meant he was betting against the housing market, anticipating a decline in prices. Though initially met with skepticism, his steadfast commitment to his positions led to substantial profits when the market began to shift as he had predicted.
As the 2007 market turmoil unfolded, major financial institutions such as Bear Stearns, Lehman Brothers, and AIG crumbled, Burry’s bet paid off handsomely, earning him a hefty personal profit of $100 million and more than $700 million for his remaining investors.
The event was chronicled by Michael Lewis in his bestseller ‘The Big Short: Inside the Doomsday Machine’ and later, it was adopted as a film.
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First Published:
16 Aug 2023, 04:09 PM IST
Business NewsMarketsStock MarketsWho is Michael Burry: Investor that predicted 2008 housing market collapse?
