Craig Effron and Curtis Schenker are what David Einhorn was before the Lehman debacle- brilliant hedge fund managers generally flying under the media’s radar. Head of Scoggin Capital Management, they invest in mergers, spinoffs, bankruptcies, and financially distressed companies through stocks and bonds.
Here is what Katherine Burton wrote about Scoggin in Hedge Hunters:
“Between 1988, the year he started the fund, and August 1, 2007, he produced average annual returns of 18.2 percent a year, after fees and using no borrowed money. He had only one losing year, 2002, when he was down 1.3 percent. His returns are not correlated to the stock market, and 90 percent of the time, his funds make money in the months the Standard & Poor’s 500 Index is down.”
Einhorn paid just homage to Schenker in Fooling Some of the People All of the Time. The reason Schenker managed to make money when the market is down is that he protects himself at the first sign of trouble by buying put options on the market indices, or shorting them using ETFs or futures when options are expensive. He doesn’t short individual stocks as a hedge, but he sometimes sells short if he believes that those stocks are going to go down. So he tries to create some value on the short side as well.
Buying put options or shorting market indices isn’t a magic formula for success. It’s more like buying insurance- which has a real cost. The upside of buying insurance is it enables your survival. Many hedge funds shut down after catastrophic (30+%) losses because they have to earn back all their losses before collecting incentive fees again. In most cases key employees don’t want to work for less money for a couple of years, so they quit. As a result, hedge funds lose their edge and rationally shut themselves down. Craig Effron and Curtis Schenker’s Scoggin lost more than 30% between December 2007 and March 2009. Luckily, most of the other hedge funds performed horribly and there was no appetite for seeding new hedge funds. So Scoggin employees stayed put.
One of Craig Effron’s favorite investments is China. “When I got to China, I realized immediately that we were in America 1910. Today in America everyone hates everyone. There is so much negativity. In China, it is all positive. I don’t know how it will play out, but this place is for real.” says Effron. Clearly he doesn’t agree with Jim Chanos, who is a bear on China’s property market.
Scogging’s latest 13F filing reveal that Craig Effron and Curtis Schenker have several of the stocks David Einhorn’s Greenlight Capital has. Apple (AAPL), Carefusion (CFN), CIT Group (CIT), Ensco PLC (ESV), Flagstar Bancorp Inc (FBC), Market Vectors Gold Miners ETF (GDX), Microsoft (MSFT), Pfizer (PFE), and Sprint Nextel Corp (S). Interestingly, Scoggin started buying Sprint Nextel before David Einhorn did. So it might be David Einhorn who is monkeying Scoggin in this case.