An eight-year rally in stocks that’s punished contrarians who’ve dared to bet against the market isn’t deterring 26-year-old Fahmi Quadir from starting a short-selling hedge fund.
“I’ve seen the tail end of a bull market and it doesn’t scare me,” Quadir, a protege of noted short-seller Marc Cohodes, said in a phone interview. Her edge? Identifying frauds or accounting vulnerabilities that could cause a stock to lose more than 60 percent of its market value, she says.
Quadir, who expects to raise $200 million at her newly created Safkhet Capital and begin trading early next year, may face an uphill climb. Hedge funds have come under fire for high fees and unimpressive returns. Fewer startups rolled out in 2016 than in any year since the financial crisis, and launches fell about 8 percent in this year’s first quarter, according to Hedge Fund Research Inc. Kynikos Associates’ Jim Chanos is among the rare short-sellers still running a big fund oriented toward betting against stocks.
“She’s the real deal,” Cohodes, who once ran hedge fund Copper River Management and is now a private investor based in Cotati, California, said of Quadir. “I think she’s ruthless, I think she’s cold-blooded, and I think she’s dogged.”
Raised in New York by parents who emigrated from Bangladesh, Quadir is a rarity for more than just her strategy in an industry dominated by middle-aged white men. She named her fund for the ancient Egyptian goddess of accounting, math and knowledge.
Krensavage Success
For the past two years, she’s been an equity analyst for Krensavage Asset Management, a New York-based firm that makes long and short wagers on stocks, focusing on health care. Her successes with drugmakers drew the attention of short-sellers including Cohodes.
Quadir says she campaigned for the Krensavage fund to turn up the dial on its wager against Valeant Pharmaceuticals International Inc. The bet, the fund’s largest winner in 2016, propelled it to a 14 percent gain, according to a letter to clients seen by Bloomberg News. Krensavage didn’t make an executive available to comment.
Cohodes said Quadir’s diligence on Valeant and Concordia International Corp. helped him gain conviction on his own wagers against those companies.
Valeant plunged more than 90 percent from its August 2015 peak to $16.46 as of Monday’s close amid concerns about the company’s debt load and drug-pricing strategy, punishing hedge funds such as Bill Ackman’s Pershing Square Capital Management. Valeant’s acquisition of Salix Pharmaceuticals for $11.1 billion earlier that year threw a spotlight on the company’s balance sheet. Presidential candidate Hillary Clinton’s comments last year suggesting a crackdown on “unjustified” drug-price increases added fuel to the selloff.
‘Right Moment’
Krensavage initiated its Valeant short in June 2015 with the shares trading at $234.38, according to another investor letter. While Quadir says she saw red flags even before the company decided to acquire Salix that March, she waited until August to scale her position and added to the bet even as the stock fell.
“What Cohodes taught me is you always have to wait for the right moment,” Quadir said. “I prefer to initiate a position so that it won’t run me over if the markets are acting crazy.”
Among short-selling casualties in the past decade, Cohodes’s Copper River Management and Bill Fleckenstein’s Fleckenstein Capital decided to close up shop in 2008. More recently, managers revered for their short wagers have struggled as U.S. stocks are up more than threefold from their crisis-era low.
Odey’s main hedge fund lost half its value last year on wrong-way wagers against stocks. Einhorn, known for profitably shorting Lehman Brothers Holdings Inc. and Allied Capital Corp. in the past, has been frustrated by attempts to short a portfolio of momentum technology stocks that he’s called the “bubble basket.” And after about five years, Ackman’s contention that Herbalife Ltd. is a pyramid scheme hasn’t worked in his favor.
Quadir will need to be relentless if she wants to survive the tough reality of betting against companies, Cohodes said.
Shorting is an “all-encompassing, knock-your-teeth-out kind of project, and a lot of people don’t have the energy, drive, determination, guts, perseverance, smarts, courage and ability,” he said. “There are so few people who can do this, so I hope she does exceptionally well.”
This article was provided by Bloomberg News.
