A Hedge Fund Manager Who’s Shorting America’s Malls | Hacker News Reader

A Hedge Fund Manager Who’s Shorting America’s Malls

wsj.com

92 pointslxm79 comments

This is probably easier for most people to read:

http://www.timelessinvestor.com/2017/04/27/use-index-to-shor...

From the article:

> When Mr. Yip cast a critical eye on regional malls’ debt in 2015, the CMBX 6 index was trading near its full value, implying a very low probability of defaults.

> Mr. Yip visited malls in Connecticut, Louisiana and elsewhere while on work trips and vacations, sometime taking his family along with him.

> He would walk three times around each shopping center, studying its mix of stores and chatting with store owners, workers and shoppers.

> He noticed some malls seemed poorly maintained and outdated, with a high concentration of mom-and-pop shops that, he figured, probably weren’t paying much in rent. Locally owned stores such as these have less staying power than stores that are part of national retail chains.

The above might be one of the better descriptions of what it can be like to be a hedge fund manager. Just like Steve Carrell's team in "The Big Short" going out to Florida and Vegas to talk to house owners and see empty subdivisions for themselves, the real world job of managing money is alot less sexy than I think alot of people believe it to be.

It's a lot of work going down avenues that end up as dead ends only to find a single potential winning idea after 6 months of work.

This guy's team had to get the hypothesis, and then do the leg work, think things that don't scale, and then even though they think they are right, you still need to find out a way to short shopping malls.

Before today, I've never heard of the Markit index CMBX 6, I'm pretty sure they spent alot of their time just finding the correct vehicle to short shopping malls with and even with this it's not a great one to one match for their thesis, but its as good as they could get.

As heard at one poker tournament that was filled with mostly hedge fund employee's. "So many good shorts, so few reliable ways to short them."

Honestly, flying around the country to check out different businesses sounds like a lot of fun to me.

I can imagine it'd be like fishing or hunting. Relaxing if you're doing it as a hobby, potentially frustrating if unsuccessful and your livelihood depends on it.

If you're at the executive level you likely have enough connections and savings that you can afford to occasionally fail without substantially affecting your quality of life.

Anybody can risk enough to fail in an irreparable way.

That doesn't mean anybody _will_ risk enough to fail in an irreparable way.

It's more like being a journalist with billions of dollars behind you.

Or a detective investigating situations in which a favourable outcome means you make boatloads of money.

A lot of people paid a lot of money to wander aimlessly around malls for a solid 2 decades.

Private equity for a company like DE Shaw is pretty fun and fascinating.

> The above might be one of the better descriptions of what it can be like to be a hedge fund manager.

Or more likely, being on the staff of a hedge fund. I doubt the boss normally does all the walking tours personally.

Or you could just short the stocks of the class B mall REITS (like PEI and CBL), which are ~8x levered.

You just made the job of managing money sound sexier than I believed it to be.

It's not just malls. NYC storefronts are emptying out as-well due to high rents and inflexible landlords, not to mention the convenience of delivery to apartment, office or pick-up location. This map captures some of those vacancies.

http://www.vacantnewyork.com/

Nice find. It looks like a snapshot from 2015/2016. Shame there isn't a Foursquare-like "check-in" app to report new vacancies (or new occupants) incl. pictures of signs so we can have a live map.

By the way, I've noticed increased turnover and empty storefronts in many little town centers and strip malls in NJ/NY state, which is bad for residents and local tax revenue. In my town, people are actually angry at property-owners who seem to have no qualms about leaving stores empty for many years and rebuffing people with entrepreneurial ideas. I always wondered how they benefit from this...

I always wondered how they benefit from this...

If it's anything like NYC, they (I'm assuming you mean landlords) benefit through tax write-off. They can write off the lost income while they wait for a (hoped for) higher paying tenant.

Unless you know some pretty odd tax laws one cannot write off the act of refusing to make money. They can write off business expenses which on an empty building are likely to be not too much different from an occupied one (some are more, some are less). I think that in some cases waiting for more rent is right, in other cases it's simply investors (many overseas) using the space to park assets. They want their money out of GBP or Yuan and in US real estate, but they don't really want to be landlords. See also pretty much every condo in Vancouver.

I also save a lot on taxes by writing off the lost income from the one-million-dollar bonus I never get!

I always wondered how they benefit from this...

Balance sheet valuation of the property? Accepting a lower rent might require a write-down of the asset, perhaps even putting the real-estate investor under water if they're leveraged?

Sometimes capitalism is indeed schizoid, if I may freely paraphrase Marx. As in this case, when capitalism logic dictates (as you very well explain) that it's better to not receive any money at all compared to receiving some money (but which is under a computed and apparently rational threshold). Capitalism and the flow of money it's all make-believe.

This behavior isn't really capitalism, it is driven by flawed U.S. tax law which allows owners to deduct interest expenses and losses.

> perhaps even putting the real-estate investor under water if they're leveraged

This made me believe that the OP was talking about a loan, contracted from another private entity (like a bank), so that the real-estate investor renting the place at a sub-threshold price would have meant that the initial estimation on which the real-estate investor had received the loan were not met anymore in case of a refinancing (and most of these types of projects get re-financed from time to time).

> I always wondered how they benefit from this...

That's because their property's value as an investment vehicle has vastly eclipsed its value as something that humans can use.

Interesting site!

"Complex problems don't have simple solutions. It could be a series of sticks: a vacancy tax, an increase in tenants' rights through guaranteed leases and binding arbitration over rent increases (as outlined in the Small Business Survival Act). Or it could be carrots: tax breaks to small businesses to help ease the pain of high rents, or streamlined registration and a reduction of regulatory hoops for certain types of retail tenant. [...]"

And some possible solutions to fix this complex problem

I'd like the first two to apply to apartments, any rent-able property really.

After that is the development stick. Tax property at a minimum based on the surrounding average property tax rates. This will encourage proportional investment in areas and prevent hold-outs who are waiting for some hypothetical from sitting on a community asset forever.

What if for some reason the property is really worth less than the surrounding properties? Seems like a recipe to have properties that barely pay for themselves, which discourages investing in renovations, etc.

Why would Eric Yip be publicising his strategy?

I suggest that it is because by encouraging others to short or sell their holdings in CBMX 6, after he has already shorted it, the value will go down and he will gain. People jumping on his bandwagon will gain less, or possibly even loose after he has cashed his position and the CBMX 6 goes up again. The mall thing is just a story to make people interested in shorting CBMX 6 - the malls themselves are not that important to the index.

I think this is a common tactic. You can see it every year at the Sohn Conference. Notable short sellers like Jim Chanos will give pretty detailed speeches outlining the case against some market sector or company. You can be damn sure they already have a huge short position against that company. As someone looking for a bet to make it's an interesting position to be in. They make a compelling case but you also know that they are heavily invested in you getting on the bandwagon.

It's worth noting that publicizing the short might not be entirely about getting others in on the bet. Very often those speeches are the first time a larger audience (and the financial media) hear about the troubles in a particular company. That can help accelerate SEC investigations, customer churn, etc.

you always "talk your own book" in the hope that other people will be persuaded and take the same position - moving the market in your favour.

the most astonishing thing about this is that he's been able to find anyone willing to go long on malls in the last 10 years.

i want to read the article about what the hell those people are thinking.

Passive investors? i.e. if a large mall REIT is publicly traded, especially in the S&P 500 etc, cash will flow into its long positions simply by virtue of that.

if such a REIT existed, that'd make some sense, but it sounds like there's nothing quite so simple, or else this guy would've been able to short more easily and directly than he did.

(or maybe there's not enough volume/whatever to have been able to short said REIT to the desired degree?)

From another comment, there are some: https://www.google.com/finance?cid=431242 and https://www.google.com/finance?cid=656855

These might be too narrow for his purposes though.

The Vanguard REIT's largest holding is Simon group, which owns a lot of malls. I don't think that REIT would be a good vehicle for shorting malls because there is so much else in it.

This has been an off and on issue on bloomberg radio for a while now. A couple of weeks ago it stayed a topic for so long (days in a row). That I also find it surprising.

Sometimes going against the market can be profitable when it falls in your favor.

Wouldn't be surprised if malls and retail space gets some sort of bailout. Especially with "X our jobs" (bring back, protect, stole) mantras that have been panning out really well politically.

I hope not. The writing's been on the wall for ten years.

They've basically had to innovate (e.g. renovate) or die. A lot of mixed used as well. This is difficult for colder climates in general.. but you get outdoor malls with restaurants, shops and apartments/condos and maybe a hotel. Even then it can be difficult. Just like the large downtown department stores that went a while ago.

>Even then it can be difficult.

Yep. The other problem is that if you're going to try to make your shopping mall vaguely mimic Castro Street in Mountain View, in addition to climate you're going to need Mountain View-like demographics. I can pretty much guarantee you that the shopping mall nearest to where I live that has JCP and Sears as two of its anchor stores isn't going to support a boutique hotel and swanky ethnic restaurants with sidewalk seating.

I've been curious as to what will happen the structures themselves. Two interesting projects:

Mall to Micro-apartments https://www.youtube.com/watch?v=HmL2l-bcuUQ

Rackspace took over a dead mall for office space http://www.nytimes.com/2012/10/31/realestate/commercial/rack...

This is something I've been wondering about too. In 20 years, will we treat abandoned shopping malls the way we today treat abandoned industrial warehouses?

Looks like Google "Street View" photographed inside the Rackspace building, too - https://www.google.com/maps/@29.5082497,-98.3933516,3a,75y,1...

My 2 cents: the news about retail is old + when the news is out, usually it is too late to trade... Those that rehash the news constantly, hope it will drive prices further down from here... Good thing my trading method has nothing to do with the news cycle...

There was a young, incredibly well spoken, and intelligent analyst on Mad Money last week from JP Morgan (Matthew Boss) who leads retail coverage for $JPM. He went on to explain that they buy satellite time and point it down at malls and count the traffic going in and out of the malls to make forecasts. Individual investors have no chance against that in terms of market data, but that's fine. Let them over analyze, over trade, and underperform.

EDIT: Just found a link to the full video interview. Worth a watch:

http://video.cnbc.com/gallery/?video=3000611847

>Let them over analyze, over trade, and underperform.

There was an interesting discussion on HN a week ago about how passive investors rely on active investors to keep prices in the market in line with their true value.

If you look at the long term (10 years) and just bought and held a common consumer company, the gains are impressive.

  10 Years
  Amazon - 1,367%
  Apple - 907%
  Google - 265%
  Microsoft - 126%
  Intel - 71%
  Coke - 65%
  Ford - 42%

There were a lot of other common consumer companies 10 years ago, too, like Sears. It's always easier in hindsight. I've been struggling with this problem in terms of picking my "blue chip" stocks to backtest -- my gains are impressive, but I doubt it was so obvious that these were blue chip stocks 10 years ago, or that these same blue chip stocks would be considered blue chips in 10 years.

You've just cherry-picked companies that have performed well, you could easily have MySpace instead of GOOG.

Or General Motors instead of Ford, and you'd have lost the entire investment in 2009.

Myspace was never public. Go back into your bunker with gold bars.

Sounds like a good move. Malls are dying. The last enclosed mall opened in the US was in 2006. (Yes, there are some megamall projects underway, such as American Dream Meadowlands, but they're in trouble.)

See "deadmalls.com".

I've been told we went through this cycle before. A lot of older malls were originally outdoors, in fact, and had roofs added over walkways later.

I don't really get the appeal of newer outdoor mall-like shopping areas. They're like malls except you get rained on and have to dodge cars and wait at lights, because of course they don't make the streets pedestrian-first. They mimic nice old-world town centers except for that key detail of narrow mainly-pedestrian streets, for some reason, which ruins them. They're still single-owner, kinda creepy, and restrict which businesses go in. I'm not sure how they're better.

Those outdoor malls are brutal in the winter for northern states.

and they are brutal in the summer for the southern states!

This is a pervasive pattern for the early 21st century: Things that work really well in the Bay Area that really only kinda work in Houston/Cincinnati/Chicago/etc...

Pretty much nobody looks up to the Bay Area for architecture...

Online retailers on the other hand are pretty much weather independent. Also, usually not based in the Bay Area at all. The big two "primarily e-commerce" businesses are based on Seattle and Hangzhou, respectively. And I guess eBay is technically San Jose... but that's likely a very distant third.

Pretty much nobody looks up to the Bay Area for architecture...

I suspect that things like meetup work much better in geographically constrained places like San Francisco.

> Pretty much nobody looks up to the Bay Area for architecture...

But they do for 'the next big business ideas because Wired says so'...

And bad in both seasons in the midwest. Leaving only a few weeks in spring and fall left to "enjoy" the outdoor mall. Sadly, in the East Bay the Emeryville Bay Street Mall wouldn't be so bad but they allow cars on the main road ruining the concept.

It's almost like one should consider climates when undertaking architectural design projects...

It depends somewhat on the climate. If you're in, say, San Jose the outdoor restaurant seating somewhere like Santana Row can be quite nice. (With heaters for the Californians when it gets below 70 degrees :-)) That particular location is also more pedestrian friendly than many are.

I've been to a couple outdoor malls that were properly laid out/designed.

1) Underground parking under a large portion of the mall.

2) Awnings so that you could stay out of the rain for the most part.

3) No roads through it.

4) Big shops, like department stores, have entrances on multiple sides that people cut through during bad weather, and often direct access to the underground parking.

(3) is a lie, there were usually one-way roads that couldn't be used by non-emergency and non-maintenance vehicles, with access points for delivery mostly along the perimeters. But where most pedestrians were, there were effectively no roads.

This kept the space more compact, as well. The one near me now is an example of a terrible outdoor mall. It's a half-mile walk, largely through empty space, to get to some of the shops. All parking is above ground. Parking and roads pervade the whole area. In essence, what they built, was about 10 stripmalls and called it one mall. This, unfortunately, seems to be the more popular style. Walking around it can feel like frogger sometimes, when the point of the space is to be relaxing and inviting.

These days I buy almost everything, except clothes and groceries, from online retailers. To get my business, an "outdoor mall" would have to provide a really compelling benefit.

Perhaps you'll be pleasantly surprised by how quickly the developers of "outside malls" have to get their act together, in order to survive.

This is somewhat deceptive. I happen to read and watch a quick walk though of one dead mall (white flint) before moving to the area and finding a much larger and nicer competitor within 3 miles of the failed mall (Westfield Montgomery).

So yea, we have not been adding malls in the US, but that's because there are few places without them so new malls would just pull business from other malls. Further, building larger competitors only works when you can actually fill them with stores and it turns out white flint was undersized for the area.

The last enclosed mall opened in the US was in 2006.

I'm pretty sure this is not true.

https://en.m.wikipedia.org/wiki/Mall_at_University_Town_Cent...

That mall opened in late 2014, and it's a very large enclosed mall. The Wikipedia article refers to it being the first enclosed shopping mall to be built in "more than five years," which suggests there was at least one other built between 2006 and 2014.

I don't think you're necessarily wrong, but I think the big issue may be that the US just has far too many malls, whether we're talking big enclosed ones like this or even relatively small strip malls. We've seriously overbuilt retail space, and that isn't a new thing. I grew up in Sarasota, where that new(ish) mall is, and watched several malls die completely in the '90s. My suspicion is that this new mall will make it, actually, but that other malls within a fairly large radius around it won't.

The fund doing the 'shorting' seems to have $96m under management [0] (in terms familiar to readers that's 0.125% of the net worth of Bezos or the same amount of cash that Uber burns in a fortnight). It's an interesting story, and I'm not arguing against the investment thesis, but it seems to be small potatoes for the WSJ.

http://www.trackhedgefunds.com/alder-hill-management-lp

Maybe he just read this book and decided to short all malls

http://www.slate.com/blogs/behold/2014/06/22/seph_lawless_ph...

In case you get caught by the paywall: http://www.timelessinvestor.com/2017/04/27/use-index-to-shor...

Anda similar piece in the financial times: https://www.ft.com/content/69515384-28f7-11e7-9ec8-168383da4...

CMBX, as a quote in this articles says, is a blunt instrument. It's a composite of 20 deals, each of which has a portfolio of different property types (office, retail, lodging, etc)

A better method is to trade single asset retail CMBS bonds

Alternatively, I think a better

> A better method is to trade single asset retail CMBS bonds

Could be hard to short though, you got to find someone willing to lend you the bond, and this paper is not liquid

It's behind a paywall but take these public short position declaration with a grain of salt - it serves them and their financial positions when it gets media exposure.

I agree, but on the face of it it does seem to make sense: there's no shortage of articles now about the "retail implosion", and lots of stores really are closing: Macy's, Sears/Kmart, etc. If a mall's anchor stores close, that can mean the death of the mall because other tenants will pull out (their leases usually allow this in the case of anchor store closure).

Personally, if I were a hedge fund manager, I'd be really careful with this and pick carefully which malls (or rather, the companies that own them) I think are going to fail. The newer, trendy "lifestyle centers" seem to be doing just fine mostly, and even the places like Macy's are still hanging on in some places, just not in others. Macy's isn't going out of business any time soon, but they are downsizing a lot, which means certain locations just aren't viable any more. Even regular malls are still doing OK in many places, but that segment of the market is shrinking.

It seems like Luxury stores are on the rise and doing great but all these retail shops aimed at the general public in malls is struggling.

In my humble opinion, it's a sign of the increasing wealth transfer from the poor to the rich. The middle class is disappearing and it looks like they are taking the Mall away....they realized vast majority just window shop.

looks like the millionaires of HN don't like hearing this haha!

I was in a mall earlier this year and went into the big department stores and looked around (JCP, Macy's, Dillard's, and Sears). It's been many years since I was in one of those stores and it felt like I had stepped out of a time machine. The stores felt very old fashioned. The decor, the sounds, the layout, everything made me feel like it was 1995 again.

This morning on his blog, Om Malik wrote this:

> United Arrows is doing retail right — in Japan. A lot more US retails chains should be paying attention to them and their formula. They have 256 stores and yet everyone of them feels special. Everything in their store is thoughtfully and tastefully curated.

I've never been in a United Arrows store, but giving each store it's own feeling seems like the right way to do things today.

That's true (especially Sears). Though, to be honest, even when I walk into a higher-end place that is clearly not cookie cutter, I'm still ready to get out of there after 10 minutes. I'm just not the department store (or shopping mall) demographic for the most part. Except for the occasional Apple Store maybe and maybe a Target I just have very little reason to frequent most of the places attached to malls in the US.

Co-tenancy provisions may not let them pull out but, even if they don't, they probably mandate a reduction in the lease. I was talking with a friend of mine who follows retail stocks and she said that these co-tenancy provisions are likely to be a big deal given the number of chains that are common anchor stores in serious trouble. She thinks that as many as 1/3 of rural malls may close over the coming years.

In my opinion, alot of this is due to greed/ the need to constantly short sightedly 'improve profits' - Rent, retail prices, etc. are only allowed by managers/owners to go up, eventually creating a situation where everything at the mall and similar properties are so expensive that no one shops there..

Like restauraunts that are empty but insist on charging $20 a plate because that's their 'business model'.. Fill the place up, then raise the price.. if it starts thinning out, lower it.. which is how the 'free market' is supposed to work.. but abstract ownership and financialization shift the actual 'commerce' into participation in equity markets rather than on-the-ground operations...

Stupid question: why are those pictures always black and white and such bad quality?

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