Michael Burry’s AI “Short”? Separating Fact from Fiction

The Misleading Headlines: Decoding the Burry Narrative

In the last 24 hours, Twitter and a slew of questionable financial blogs have been ablaze with the assertion that Michael Burry — the renowned hedge fund manager catapulted to fame by “The Big Short” — has initiated a $1 BILLION short position, signaling an impending stock market collapse. These claims are primarily fueled by purported Twitter posts attributed to Burry himself. We’ll dissect these Tweets shortly.

More specifically, social media chatter suggests that Burry allocated $1 billion to bet against the success of NVIDIA and Palantir, anticipating a dramatic price decline. This buzz, at least partially, appears to have impacted market sentiment, evidenced by NVIDIA’s 4% dip and Palantir’s 9% drop as of Tuesday afternoon.

That’s not really what’s happening, though…

Understanding 13F Filings: A Window into Institutional Investing

The source of this misinterpretation stems from the recently released 13F filings. These filings are mandatory reports that institutional investment managers with at least $100 million in assets under management (AUM) must file with the SEC on a quarterly basis. They disclose the fund’s equity holdings as of the last day of the quarter. The latest filings cover the period ending June 30, 2023. While they provide valuable insights, they are backward-looking, offering a snapshot of holdings at a specific point in time, not necessarily reflecting current positions.

Scion Asset Management’s Holdings: Beyond the Billion-Dollar Headline

Scion Asset Management, Michael Burry’s firm, did indeed report put options against the S&P 500 and the Nasdaq 100. The notional value of these put options, combined, reached approximately $1.6 billion, close to the reported $1 billion figure. However, the crucial point being overlooked is that this is the *notional value* of the options, not the amount of capital Scion spent to acquire them. The cost to purchase these options would have been a fraction of that figure. The notional value simply represents the underlying value of the assets being bet against.

The Role of Put Options: Hedging or Speculation?

Put options provide the holder with the right, but not the obligation, to sell an underlying asset at a specified price (the strike price) on or before a specified date (the expiration date). If the asset’s price falls below the strike price, the put option becomes profitable. Institutions use put options for various reasons, including hedging existing long positions to protect against potential losses, or for speculative purposes, betting that the asset’s price will decline. It’s impossible to determine Scion’s exact motivation without inside information, but the presence of put options doesn’t automatically equate to a prediction of imminent market collapse.

NVIDIA and Palantir: Exiting Long Positions, Not Shorting

Furthermore, the narrative around NVIDIA and Palantir is equally misleading. Scion Asset Management actually *sold* their long positions in these companies during the second quarter. This means they previously held shares of NVIDIA and Palantir and decided to liquidate those holdings. This is the opposite of shorting, which involves borrowing shares and selling them with the expectation of buying them back at a lower price later. Selling a long position simply means taking profits (or cutting losses) on an existing investment. The SEC filings show that Scion completely exited its position in both NVIDIA and Palantir, choosing to no longer hold those stocks.

The Illusion of Causation: Burry’s Influence and Market Reactions

Attributing the recent dips in NVIDIA and Palantir stock prices solely to the news of Burry’s reported short bet is an oversimplification. The market is influenced by a multitude of factors, including macroeconomic conditions, interest rate expectations, earnings reports, and overall investor sentiment. While news of a prominent investor like Burry making a significant move can certainly influence short-term trading, it’s unlikely to be the sole driver of a 4% or 9% price decline. The AI sector, in particular, has experienced significant volatility, making it susceptible to rapid price swings based on various news events and analyst opinions.

Beyond the Tweets: Analyzing Burry’s Broader Market Views

While the tweets are often cryptic and open to interpretation, examining Michael Burry’s broader market views provides a more nuanced understanding of his investment strategies. He has consistently expressed concerns about excessive speculation, particularly in high-growth technology stocks. He has also warned about the potential for inflation and the impact of rising interest rates on asset valuations. Therefore, the put options could be part of a broader strategy to hedge against a potential market correction, rather than a specific bet against the AI sector.

The Dangers of Clickbait: Responsible Financial Reporting

This entire episode highlights the dangers of relying on sensationalized headlines and unsubstantiated rumors in the financial media. The rush to publish clickbait often leads to misinterpretations and inaccurate reporting, which can negatively impact investor decisions. It is crucial to critically evaluate information from various sources, consult reputable financial analysts, and understand the underlying data before making any investment decisions. Doing your own due diligence is paramount.

Conclusion: Context is Key in Understanding Investment Strategies

In conclusion, the claim that Michael Burry placed a $1 billion short bet against the AI bubble is a gross misrepresentation of the facts. He bought put options against the S&P 500 and Nasdaq 100 (not NVIDIA or Palantir directly, for which Scion actually sold its shares), and the $1 billion figure represents the notional value of the options, not the capital outlay. While Burry clearly has concerns about the market, it’s essential to interpret his moves within the context of his broader investment philosophy and the limitations of 13F filings. Don’t believe everything you read on Twitter.

FAQs

What is a 13F filing?

A 13F filing is a quarterly report required by the SEC from institutional investment managers with at least $100 million in assets under management, disclosing their equity holdings.

What does “notional value” mean?

Notional value is the total value of the underlying asset in a derivative contract, such as an option. It represents the value on which payments are based, not the actual cost of the contract.

Is Michael Burry predicting a market crash?

While Burry has expressed concerns about market conditions and potential risks, it’s difficult to definitively say whether he’s predicting a crash. His recent moves could be interpreted as hedging strategies or speculative bets, and it’s important to consider the context of his overall investment approach.