Finance

The Big Short… Part Two: In a bet that’s electrified Wall Street, one trader’s gambled £80m on the demise of US shopping malls

Short call: Wall Street trader Eric Yip is betting shopping malls will collapse

Eric Yip spent his childhood working in his parents’ store at a shopping mall in a small New Jersey town. The family sold homewares and T-shirts from the Burlington Center.

In the early 1980s, the 103,000 sq ft retail complex had more than 100 stores and was the heart of the community, credited with creating a development boom in the town.

Today, though, just a handful of shops remain and it is virtually silent.

The fate of his home mall has prompted Yip, now a hedge fund boss in New York, to make one of the most talked-about trades on Wall Street.

With echoes of The Big Short – the Oscar-winning movie about how a few finance gurus got rich betting the US sub-prime mortgage market would collapse – Yip is gambling that the US is facing a retail apocalypse.

Using a previously little-known index, he is betting that bonds containing mortgages paid by shopping malls will fail to be repaid as stores go bust.

He is so convinced that it is thought up to half his £155million fund at Alder Hill Management is invested in these bonds, known as CMBX 6. It’s a gigantic stake on just one asset.

He is trying to encourage other investors to take a punt, too, having written a dossier which he sent round Wall Street outlining what he believes is the bleak outlook for US shops.

Yip suggested that more than two dozen malls in the US could default, and that bankruptcies were likely to be ‘just a matter of timing’.

Russ Mould, from the British broker AJ Bell, said: ‘Investors are sensitive at the moment. If the Fed raised rates too quickly, or rolled up quantitative easing, there could be problems. For a hedge fund prepared to sit and wait, possibly for years, they could be proven correct.’

Born in Hong Kong, Yip, 42, moved to New Jersey at five. He studied accounting and became an analyst with legendary hedge fund boss Carl Icahn. In 2014, he started work for Alder Hill.

A year later it lost 13.6 per cent, and Yip became convinced that all was not well with US shopping malls.

So he began to visit shopping centres across the country. He noticed many seemed poorly maintained and outdated. A high number had family-run businesses which he realised probably weren’t paying much rent.

He began to cast a critical eye on shop debt, looking at the CMBX 6 index. He noticed it had been trading well with few defaults, and predicted this would not continue. So he made a large bet.

Film: Christian Bale stars as Michael Burry in the Big Short. Burry made millions betting that mortgage-backed securities would fail. Could the same thing happen with shopping malls?

At the start of 2016, the index plunged 20 per cent. It rose a little, but has since fallen. Meanwhile, Alder Hill gained 7 per cent last year.

It is a move that has drawn comparisons with the actions of Michael Burry, the real-life hedge fund guru depicted by Christian Bale in The Big Short.

Before the financial crisis, Burry bet that mortgage-backed securities would fail because – thanks to the US banks’ reckless lending – homeowners would not be able to afford to repay their home loans.

Burry shocked the financial world, and many of his investors, by acting at a time when all the big banks were denying there were problems with their mortgage books. But after Lehman Brothers collapsed, Burry was to be proved right and made millions.

Yip’s bet is similar.

The CMBX index was largely ignored by mainstream investors. It is a credit-default swap that bets on whether mortgages for shops will be repaid.

Yip looked in detail at this swap and discovered 40 of the 1,500 loans it contained were shopping malls. Looking further he discovered that around half of them had weak sales data.

If most of these weaker malls began defaulting on their loans and were liquidated, investors would stand to make a killing.

It’s a bet that has paid off so far.

Concerns about stores are mounting. And fears are growing that these property groups could struggle as they find themselves saddled with more and more empty units they can’t rent out.

Analysis has shown a 50 per cent drop in visits to US malls over the past three years and that there were more retail bankruptcies in the first three months of the year than in the whole of 2016.

It has been suggested 3,500 shops in US malls could close in the next couple of months, forcing many malls themselves to shut.

Yip’s bet against the retail market has seen his fund gain 8 per cent in the first three months of the year.

Bets against the owners of big shopping malls in the US are now rising steadily. About 5 per cent of the shares of the biggest real estate investment trust – around £770million – are held by short sellers, and most are betting on a fall in smaller malls.

Shares in these are down as much as a third this year. By contrast, the shares of larger malls have been doing well, although many expect this will not last.

But there are critics who believe that Yip, who could not be reached for comment yesterday, may have made the wrong call.

Mark McAllister, of the US fund Clearbridge Investments, said: ‘There have been closures and bankruptcies. Most are retailers which have too much debt, don’t have the right products or are bad merchants.

‘Over time, good companies will do well. I think this shorting phenomenon is overblown and a harsh judgment on the mall industry.’

Only time will tell whether Yip’s giant bet foretold the beginning of the end for US mall retailers.

Short order: Crispin Odey of Odey Asset Management

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