- Short seller Fahmi Quadir, who runs the fund Safkhet Capital in New York, made a 24% return last year.
- In an interview with Business Insider, Quadir said her winning trades come from focusing on shorting companies with "predatory business models."
- The 28-year-old is currently eyeing a private company focused on the student debt market, that may eventually IPO.
- She said her fund only makes "conviction" bets because it "can’t afford to spend time throwing darts."
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Short seller Fahmi Quadir says her Safkhet Capital fund made a 24% return in 2018, an impressive feat for a year that saw hedge fund after hedge fund end up in the red. Her strategy: make big, all-or-nothing bets on companies with what she calls "predatory business models."
The tactic was a winner in her bet on MiMedx, a biopharmaceutical company rocked by whistleblower and accounting scandals that led to a management overhaul and a whopping 93% plunge in the stock.
While this year’s short bet on German payments company Wirecard hasn’t yet tracked the success of 2018, she’s already plotting her next target. To find it, she said she started eyeing Americans’ ballooning US debt pile.
Quadir said she’s lured by companies in that space who have products that are priced higher than those of peers, which "contributes to a debt spiral."
While declining to name any specific names, Quadir said she’s researching a potential short trade of a firm focused on student loan debt, which is currently private and might eventually IPO.
"It’s more the business model itself that attracted us, we’re not making a call on the debt market itself," she said in an interview. "But in these companies that are focused on the consumer, the level of bankruptcies and delinquencies have been ticking up in the past year."
According to the Federal Reserve, US outstanding student loan debt has more than doubled to $1.6 trillion in the past decade, while last year US credit card debt hit a record $870 billion.
"If you look at these underlying asset-backed sectors, the underlying accounts are certainly deteriorating," she said. "Then you have companies dependent on these markets to access liquidity, so it becomes more difficult when the quality of accounts has deteriorated so much."
She points to the Fed’s warning late last year that business-sector debt relative to GDP is worryingly high.
"So they’ve been able to obtain debt at very cheap terms." she said. "What that’s led to is being able to keep the doors open, but not necessarily sustainable. Once they’re unable to access the credit markets, it’s unclear whether they’re able to maintain the business."
Fahmi Quadir burst onto the seen in a Netflix documentary
Quadir burst onto the scene in a Netflix special called "Dirty Money," where she joined her bearish peers in calling out the drug giant Valeant. With that trade, Quadir took on Bill Ackman, a longtime Valeant bull who lost billions when suspect accounting revelations tanked Valeant’s stock and eventually prompted a management overhaul.
She’s followed others’ lead on some of her other bets as well (Tesla, Wirecard, South Africa’s Capitec Bank).
"Another thing we look at is companies that have been targeted in the past — investigative journalists, short sellers, consistent criticism over a period of time — how odd that these companies have managed to succeed," Quadir said. "Because usually, when there’s that kind of consistency, there’s something behind that."
Quadir also wasn’t the only one who piled into MiMedx. The short seller Marc Cahodes and Viceroy Research founder Fraser Perring famously pushed the short case on the trade for more than a year. MiMedx replaced its CEO and a key exec after the company found insiders spied on whistleblowers who had called out revenue manipulation.
It’s been a rocky year for some big bets. Wirecard, which Quadir’s Safkhet Capital is "significantly" short, has seesawed up and down, even rallying year to date — despite several explosive reports from the Financial Times outlining suspect accounting practices. Wirecard has denied the claims.
"Generally, we’re focused on fraud and exploitative practices, so that’s where we’ll be looking first," Quadir said. "That’s not thematically driven, but you’ll see the connection if you look at our portfolio."
Quadir’s fund is smaller than most hedge funds. And it only has one analyst, a 33-year-old out of Yale’s business school, Christina Clementi.
But that’s not the only reason she bets on very few trades: "We can’t afford to spend time throwing darts," Quadir said. "We would rather spend that time on our conviction ideas."
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