Last year, Ravi Chopra was travelling through Europe to shop his latest short idea to potential investors.
His New York hedge fund, Azora Capital, was betting against a handful of US banks and the chief investment officer had a stack of slides with him to make his case.
One slide in the presentation read: “No way out.”
“A lot of investors would look at me, quizzically, and say: ‘How could these highly regulated, sophisticated financial institutions make such an obvious mistake?’” Chopra said.
The mistake the banks had made, which Chopra and his team had uncovered, was three years, trillions of stimulus dollars and 500 basis points of US interest rate rises in the making.
Those factors materialised after the pandemic, as the US Federal Reserve cut and then raised interest rates at historic speeds while the government rolled out a record $US5 trillion ($7.9 trillion) of stimulus measures to manage the economy through the crisis.
All this amounted to what Chopra called “the ingredients for a banking crisis”, a recipe he had become familiar with during his 20-year career specialising in financial institutions.
Chopra started as a researcher in the financial services arm of Goldman Sachs in 2001 and quickly fell in love with the sector.
“Financials are really all in the weeds,” he told The Australian Financial Review in an interview from New York. “It’s all about numbers, it’s about modelling. It’s not just about looking at an earnings reports, but also looking at any regulatory data that we can get our hands on. I was hooked.”
Eventually making the shift to the buy side, Chopra joined hedge fund Sigma Capital in 2007 just in time to witness a series of bad loans in the US real estate market trigger the worst global banking crisis since the Great Depression.
“That’s really where I honed my skills in investing in this unique space,” he said.
“We were basically picking through companies that had taken the pain upfront and could withstand it and looking for those that, when we ran it out over two years, were clearly capital deficient and would either have to raise capital at distressed levels or simply wouldn’t make it.”
After riding the global financial crisis with Sigma, Chopra moved on to help launch a new venture, Samlyn Capital, as a partner and the firm’s head of US financial services.
When history rhymes
A few years later, Chopra began to consider starting a standalone financial services hedge fund.
“I looked around and there were so many sector funds, but there really weren’t many with real dedication to financial services,” he said.
“Even generalist long-short funds tended to shy away from financials. They’re hard, complicated and regulated. They’re also cyclical, opaque and highly levered. All those things are absolutely true, but that’s what we love about the space.”
Azora Capital launched in the back half of the 2010s, and as markets ticked over into the new decade, Chopra started to see echoes of 2008 emerge when the Fed started lifting rates last year.
“History was absolutely rhyming. Things were looking pretty similar, but the drivers were different,” he added.
“Back in the GFC it was all about credit and capital, and so for the last 15 years, bank management teams, regulators and rating agencies have been doing stress testing around those issues.”
But while the industry was focused on credit threats, Chopra believed not enough attention was being paid to the other key factor driving financial institutions – interest rates.
“Over the last 15 years, many of those financial institutions were quietly trading out credit risk for interest rate risk. Credit risk was the problem of yesteryear.”
And by late 2022, those interest rate risks were ballooning fast. Much of that $US5 trillion of stimulus that had taken place during the pandemic had found its way onto bank balance sheets.
“Typically, industry-wide bank deposits grow about 6 per cent per year. It’s usually very steady but in those two years, bank deposits grew by 35 per cent.”
Looking around, Chopra saw that some banks, much like the American citizens stuck at home during the pandemic, had gone on a stimulus-led shopping spree.
“But they weren’t buying Peloton bikes, they bought things like Treasury securities at the lowest yields in the history of the United States. And so they had to go out to 10- or 15-year maturity schedules to get any kind of yield,” the CIO said.
“Banks that touched growth industries like technology, biotech and crypto doubled, tripled, or even grew eight times in size in two years. That was wholly unnatural in financial services.”
So, why did the banks take on the risk? According to Chopra, bank treasurers simply weren’t expecting what happened next.
“Ever since the GFC, regulators mandate that most of the systematically important banks undergo stress testing. In their worst-case test assumptions, the stockmarket goes down 50 per cent, real estate prices drop 40 per cent and unemployment goes to 10 per cent.
“But in their interest rate assumptions, the cash rate goes from 70 basis points to just 1.5 per cent. That was their worst-case scenario – 80 bps.”
So when the US Fed began ratcheting up rates by hundreds of basis points in 2022 and 2023, the bond portfolios of some banks were suddenly losing value fast.
No way out
Rising rates had pushed the market value of the banks’ long-duration bond portfolios negativejust as deposits had started fleeing bank accounts to other alternatives. That meant those banks that hadn’t insured their deposit base were suddenly facing a liquidity crunch.
“Credit losses maim, but its really liquidity that kills financial institutions,” Chopra said. “Much like the global financial crisis, many of the banks were undercapitalised and based on today’s standards, a number of them were actually mathematically insolvent.”
Chopra and his team began screening US banks for high levels of unrealised bond losses and low levels of deposit insurance, and four names rose to the top – Silvergate, Silicon Valley Bank, Signature Bank, and First Republic.
“All four of those banks had 70 to 90 per cent of their deposit bases uninsured, which is measurably higher than the rest of the industry,” he said.
By March 2023, cracks were emerging and crypto bank Silvergate fell, following the failure of major depositor FTX, the now defunct crypto exchange founded by Sam Bankman-Fried.
The Silvergate collapse sparked widespread liquidity concerns, particularly in start-up and cryptocurrency exposed financial institutions.
Silicon Valley Bank was the next to fall after announcing plans to sell one of its smaller $US20 billion portfolios of US Treasuries at a $US2 billion loss.
“Depositors started getting really nervous and that led to a quiet but deadly electronic run on the bank that happened during the course of an afternoon, as the stock price continued to fall,” Chopra said.
“And then ultimately, over the course of the weekend depositors became more concerned about deposits and other financial institutions and similar situations happened with Signature Bank on that Friday, and then ultimately with First Republic.”
Just like Chopra’s slide had warned a year earlier, the banks had no way out.
While SVB marked the largest US bank collapse in more than a decade, it also resulted in Azora Capital’s best monthly return since its inception.
“In 2008 and 2009, 165 banks failed, comprising half a trillion dollars of assets. In the spring of this year, four banks failed, comprising half a trillion dollars of assets,” Chopra said.
Six months on and the industry is still feeling the shock.
“We did a survey of the top 50 financial institutions in the spring, and over 70 per cent of them said that they were tightening underwriting standards. That’s something I haven’t actually seen in my career, certainly not since the GFC,” Chopra added.
Meanwhile, the hedge fund is back to work, combing through regulatory filing and financial models, looking for the next opportunity.
“It’s often in row 500 of the Excel model on Tuesday night at 10pm that the proverbial light bulb goes off over our heads. That’s where the epiphanies are, that’s our secret sauce.”
Ravi Chopra is speaking at Sohn Hearts & Minds at the Sydney Opera House on November 17. Tickets available here. All profits will support Australian medical research organisations. The Australian Financial Review is a media partner for Sohn Hearts & Minds.
This article was originally posted by The Australian Financial Review here.
Licensed by Copyright Agency. You must not copy this work without permission.
Healthcare stocks – from sleep apnoea giant ResMed, to cancer diagnostic biotech Telix Pharmaceuticals – were recommended at the Sohn Hearts & Minds Investment Leaders Conference on Friday.
Munro Partners partner Kieran Moore believes London-listed money transfer company Wise could see its share price soar 50 per cent by 2025, as its problem-solving business model gains traction while benefiting from higher interest rates.
Institutional investors such as super and pension funds are investing in private equity at “exactly the wrong time”, a top hedge fund manager has warned, as sharply higher interest rates threaten a wave of bankruptcies.
The world’s highest-profile tech investor, Cathie Wood, might be bruised but she is certainly bullish. Nor is she holding back. “I have always hated searching on Google,” she says of the search giant.
Cathie Wood has rightly called several of the big themes driving markets this year. But the world’s most divisive investor says we’re thinking about AI in the wrong way.
Tech investment guru Cathie Wood is still a big believer in bitcoin, so it was fitting that she chose Grayscale Bitcoin Trust as her stock pick for the 2023 Sohn Hearts & Minds Investment Leaders Conference.
Speaking at the Sohn Hearts & Minds conference on Friday, the Future Fund’s chief investment officer Ben Samild said it had traded around $65 billion worth of its portfolio for assets with better protection against what is expected to be a long-term inflationary environment.
When Damian Lewis, the actor who plays the ruthless hedge fund boss in the drama series Billions was looking for inspiration, he sat down with Daniel Loeb.
The US financial sector is not without its problems but Ravi Chopra backs Webster Financial Corporation as his stock pick for the 2023 Sohn Hearts & Minds Investment Leaders Conference.
It might be time to look beyond big name, overpriced Wall Street stocks that could struggle to deliver growth. That was the message from top fund managers, company founders and super funds at the Sohn Hearts & Minds Conference.
A year on from the start of ChatGPT, the Future Fund hasn’t decided how to play this phase of the AI revolution but is open to the possibility it will be a major boost to productivity.
The Future Fund, Australia’s $200 billion sovereign wealth fund, has been sounding the alarm on the developed world’s rising levels of debt, the prospect of higher inflation, and the risks in the bond market for longer than most.
Most hedge fund managers brag about their wins and shy away from their losses – Martin Hughes is not most hedge fund managers.
Bryce and Ren from Equity Mates are joined by Ashish Swarup is a Portfolio Manager and Investment Analyst at Aikya Investment Management
Australia’s best stock pickers have just eight minutes to convince the country’s top money managers they have found an investment gem that the market has overlooked.
Daniel Loeb of Third Point says the way companies are dealing with the high cost of debt is delivering new opportunities.
When genomic scientist Daniel MacArthur had the opportunity to set up a new Centre for Population Genomics in Australia in 2019, he jumped at the chance to return home after 12 years living overseas.
European leisure and luxury – a designer handbag, a last-minute flight to Monte Carlo, a stay in a five-star hotel – is where many choose to spend their hard-earned cash. For Sharif el Khazen, it’s where he makes it.
Mining stocks are poised to rise amid tight supply for key commodities such as copper, nickel and uranium, says Terra Capital founder Jeremy Bond.
The culture at Ray Dalio’s massive hedge fund has been a source of intrigue, and with a new book, controversy. Atul Lele says it’s made him a better investor.
Global growth fund manager Munro Partners will have a difficult task choosing a single company to tip to an audience of industry heavyweights at the Sohn Hearts & Minds conference.
Sheila Patel says it’s time for the venture capital sector to “grow up” and higher rates will help do that. VC firms need to think differently about how they invest.
Melbourne scientist Misty Jenkins has had a long-time interest in immunology. But it was a neuroscientist friend who urged her to focus her skills on seeking a cure for brain cancer.
Tom Naughton is Managing Partner and CIO at Prusik Investment and speak with Equity Mates ahead of his appearance at the Hearts and Minds conference.
A true contrarian investor, Chris Kourtis can find himself sounding a lot like a bull when in the company of bears, and there’s a lot to be bearish about at the moment.
As soon as the three musketeers [Guy Fowler, Matthew Grounds and Gary Weiss] spoke to me I said ‘stop’. They said ‘we haven’t finished’. And I said, ‘I’m in’. We invested $10 million in Sohn Hearts and Minds. So substantial enough for a young fellow like me.
Famed hedge fund manager Dan Loeb has been named as one of the headline acts for next month’s Sohn Hearts & Minds philanthropic investment conference to be held in Sydney. Mr Loeb, 61, has built a reputation as a fierce shareholder activist and oversees $US11.7 billion ($18.5 billion) at New York-based Third Point.
When Ravi Chopra reveals his stock pick at the prestigious Sohn Hearts & Minds conference at the Opera House in Sydney next month, it could well be a short bet on a US bank.
Bryce and Ren from Equity Mates are joined by Rikki Bannan, Executive Director and Portfolio Manager at IFM Investors.
Last year, Ravi Chopra was travelling through Europe to shop his latest short idea to potential investors. "Financials are really all in the weeds," Ravi Chopra shared with The Australian Financial Review. "It’s all about numbers, it’s about modeling. It’s not just about looking at earnings reports, but also diving into regulatory data.
“Healthcare is often viewed as a stable, defensive sector to invest in, but in small caps that hasn’t necessarily proven to be the case,” she says in an interview with The Australian ahead of her appearance as a stock tipper at the Sohn Hearts & Minds conference in Sydney next month.
According to Dr Attia - who will speak at the Sohn Hearts & Minds in Sydney next month - nothing is completely random. He has built a career unearthing about what fuels a long life and shared his knowledge in the bestselling book Outlive: The Science & Art of Longevity.
Angela Aldrich bet against Treasury Wine Estates at the top of the market; now the Bayberry Capital founder is preparing to make her next big call.
Influential New York hedge fund manager Ricky Sandler says no one is focused on picking interesting, idiosyncratic stocks.
After a decade of easy money pushing equity markets in one direction, Wall Street hedge fund manager Ricky Sandler says the return of volatility and higher interest rates is seeing money return to long-short strategies.
When New York-based hedge fund manager Ricky Sandler arrived in Australia a year ago to spend time with his son who was studying in Sydney, he didn’t expect to become the reigning champion of a philanthropic investor conference.