Kerrisdale Capital - Some interesting inside info on Sahm Adrangi, the dude who founded this company...
Kerrisdale Capital
Founded: 2009
Assets under management: $250 million
Twitter followers: 1,925
Lesson: It pays to do your homework. It also pays to be a loudmouth.
“Oh, man, did you read the Burkle letter?”
Sahm Adrangi, the 32-year-old founder of Kerrisdale Capital, turns up the volume on his office speakerphone. “No, read it to me,” he says to the trader on the other line. The trader cackles. “I’ve never seen anything like it in twenty years. Okay, ready? Listen to this: ‘Stop acting like a spoiled child. Stop playing with the company as though it’s your new toy. Get Morgans on the market, and sell it to an appropriate buyer … Ask your mother to buy you something else.’ ”
Adrangi, an Iranian-born Canadian with two-day stubble and mussed, dark-brown hair, breaks into a giggle. The letter’s author, investor Ron Burkle, is a well-known Wall Street loudmouth who, for his latest act, has decided to torment the board of Morgans Hotel Group, which operates properties like the Hudson and Mondrian hotels. Burkle wants the company’s chairman, a young financial scion named Jason Kalisman, to sell Morgans. Kalisman won’t sell, so Burkle is trying to shame him into submission with a poison-pen letter. It’s a classic Wall Street proxy battle, and Adrangi—who owns 4.2 percent of Morgans—is on Burkle’s side.
“He’s just this, like, cocksucker,” Adrangi says of Kalisman. He leans back in his desk chair. His sleeves are rolled, and an inch of ankle peeks out from under his slacks. “He’s arrogant but with nothing to be arrogant about,” says Adrangi. “He went to Harvard, so he thinks he’s hot shite.”
Normally subdued, Adrangi is riled up about the Morgans situation, which he thinks is rewarding the stubborn board at the expense of shareholders. Before today, he’d been preparing his own letter that came to the same conclusions as Burkle’s, though with far less colorful language, but he hasn’t sent it yet, partly because he’s still getting the hang of this corporate-raiding thing.
“Maybe it’s time for us to go nuts,” Adrangi says to one of his employees, a Wharton-educated junior analyst. His voice cuts through the air of Kerrisdale’s office, a nondescript suite on the third floor of a midtown building. The area around his desk is littered with an empty Marlboro pack, a Curious George lunch box, and a Post-it note on his computer monitor reminding him never to buy Apple stock again.
“My inclination is we drop the letter today,” says the analyst. “I think now or never.”
Adrangi taps his foot under his desk and shakes his head. “Ehh, we can do it tomorrow. I think today is too quick. Plus, I’d like to get on CNBC for it.”
“The goal is to get people to do what we want them to do,” the analyst protests.
“I think it’s good from a PR perspective to go after these guys,” Adrangi says, flicking idly through his Facebook feed. “I just don’t know if it’s going to make us any money.”
This kind of restraint is getting harder for Adrangi, who made his name first as a short-seller, betting against what he believed to be fraudulent Chinese companies. He made his first millions when their stocks fell. The success attracted the attention of much bigger fish, and his bedroom operation turned into a $250 million fund. At an age when most of his peers are still doing lunch runs for their bosses, Adrangi is one of the most aggressive investors on Wall Street, a guy some hedge-fund observers expect to one day join brawlers like Carl Icahn, Daniel Loeb, and William Ackman in the big leagues. To keep that reputation, he’s been trying to build his notoriety by inserting himself into high-profile rumbles.
Adrangi, whose father owns a chain-link-fence company, is a fairly recent convert to dog-eat-dog capitalism. At Yale, he wrote columns for the campus newspaper that show his ideological evolution from lefty rabble-rouser (“When I first set foot on Old Campus, I couldn’t wait to stick it to the man and topple his evil capitalist empire”) to market-infatuated econ major (“Nowadays, I see trade as a cure to global poverty. I see sweatshops as a necessary evil.”). After graduation, he came close to taking a job at The Wall Street Journal but instead went to do investment banking at Deutsche Bank, followed by a few short stints at hedge funds. Then, in 2009, he struck out on his own, trading $300,000 of his and his parents’ money in a one-man shop he named after the Vancouver neighborhood where he grew up. At first, he worked out of his East Village apartment, which he shared with three friends. Eventually, he persuaded a hedge-fund recruiting firm to rent him an empty desk, where he would often show up in shorts and flip-flops before opening bell.
“It was just me and a computer and a whole bunch of people who thought I was unemployed,” he says.
Lots of hedge-fund managers are happy to operate in secrecy, but Adrangi decided early on to make himself known. Once a month, he e-mailed an investment write-up to a list of 30 or 40 people he knew in the industry. In time, one of his roommates, who ran a blog for distressed-debt investors, began posting these notes online, and his distribution list grew. He also began spending time on geeky finance websites like Value Investors Club, SumZero, and Seeking Alpha, where investors gather to exchange stock ideas and call each other idiots in the comments section.
Adrangi was good from the start. In 2009, he made nearly 40 percent on his money, thanks to an esoteric trade involving the warrants of special-purpose acquisition companies that could be used for low-risk profits via some clever financial alchemy. (“Free money,” he calls it.) But his fund was still tiny by Wall Street standards, and he was still a no-namer outside his webby finance clique.
His mainstream break came in 2010, when he began researching U.S.-listed Chinese companies, outfits that were based in China but had managed to get themselves onto the American stock exchanges by performing what’s known as a reverse merger. As Adrangi looked through their U.S. filings and compared them to filings he had obtained from a Chinese regulatory agency, he found red flag after red flag: accounting irregularities, dubious growth claims, shady auditing practices. In one case, a for-profit education company, China Education Alliance, was claiming millions of dollars in revenue despite having a website that was barely functional. Adrangi hired a Chinese investigator to visit the company’s training center, which was found to be almost entirely empty. Once he was sure the company was, in his words, “mostly a hoax,” Adrangi spent more than 20 percent of his entire fund shorting its stock. He had been posting about his findings on Seeking Alpha under the pseudonym “ChineseCompanyAnalyst,” but he used the Kerrisdale name for his new research. The stock fell nearly 40 percent in two days. His fund finished up more than 60 percent for the year.
Adrangi, who was eventually outed as ChineseCompanyAnalyst by a Bloomberg Businessweek reporter, wasn’t the only trader questioning the legitimacy of reverse-merged companies—and had in fact been steered to them by a Texas investor named John Bird—but he was among the most persistent. Over the next few months, he found several more Chinese companies he suspected of fraud. Each time the routine was similar: Short the stock, write the report, post it online, and watch the stock fall.
He estimates he personally made “a couple million” from the Chinese shorts, but more important, he got his name out in the open. Most hedge-fund managers try to move markets by presenting their new investment ideas at big, flashy investment conferences or on CNBC, where they can be assured of an instantaneous reaction. But Adrangi realized that as long as he stuck to smallish, little-known companies and really did his homework, he didn’t need a huge audience to move a stock. He just needed his blog, his e-mail list, and a good idea. Institutional investors had once scoffed at hedge-fund managers who had Internet presences, figuring they were minor-leaguers. But Adrangi was different. Smarter. Luckier, maybe. He was the most successful guy in the online peanut gallery—and one with prime brokerage at Goldman Sachs and a team of white-shoe lawyers from Akin Gump.
“Publishing to support a stock position is something you see the big guys do, but really taking that on at a smaller level is probably more effective,” says Cal Wells, a close friend and former trading opponent of Adrangi’s. “Watching Sahm take that model and run with it has been pretty interesting.”
By the end of 2011, Adrangi was big time. Thanks to the Chinese shorts, Kerrisdale was up 180 percent for the year, and by the end of 2012, it was ranked one of the best-performing hedge funds in America over a three-year period, according to the Barclay Hedge Fund Index. His fund began attracting tens of millions from new investors, and his success freed him from trying to prove that he was a grown-up.
“In this business, you can be a total weirdo, be a nice guy, whatever,” he says. “All that matters is where your returns are.”
Lately, Adrangi has been enjoying the fruits of his success. He moved into a spacious Soho penthouse with twin terraces, began spending weekends at a shared house in the Hamptons, and switched out his suits for Hugo Boss. His life now includes assistants and occasional chefs and D.J.’s for the Thursday-night parties he throws in the summer. The most recent addition to Adrangi’s life is his girlfriend, Kim Taylor, a tech entrepreneur who starred on a Bravo reality show about Silicon Valley start-ups. Taylor, who runs a search engine for not-for-profit online colleges, met Adrangi while researching the University of Phoenix’s parent company, in which Adrangi owned stock. He was immediately smitten, and soon after, while on a trip to Las Vegas, he commissioned a painted portrait of Taylor wearing a Minnesota Vikings jersey. The portrait now hangs in Adrangi’s living room, and Taylor, who was tickled by the jokey gesture (she’s a hard-core Packers fan), has all but moved in.
“He’s very quirky,” Taylor says. “He’s like a finance bro, but he’s not. He’s a very mild-mannered Canadian. He’s an exceptionally well-put-together person.”
Adrangi’s rise has inspired some predictable sniping from other hedge-fund managers, who think his Chinese shorts were a one-off hit. “He runs a little fund. How big’s his fund?” asks Andrew Left, a short-seller who runs an online newsletter called Citron Research. “He’s not a trailblazer. I think he does nice research. I also know of a bunch of other guys who are much better. But 2011 was an outlier. He caught an amazing move in the market.” Others see Adrangi as an all-but-inevitable billionaire, poised to compete with his idol Loeb, who started young like Adrangi and eventually built his fund, Third Point, into a $13 billion juggernaut.
“I think Sahm is the Dan Loeb of his generation,” says John Hempton, an Australian hedge-fund CIO, who was also shorting Chinese reverse mergers in 2011. “He’s got this strange combination of modesty, genius, and awareness of his own limitations.”
Earlier this year, Hempton introduced Adrangi to Loeb himself. Loeb, of course, is best known for the vitriolic letters he sends to the corporate executives he thinks are falling down on the job, but Adrangi spent the conversation asking how to institutionalize his fund—in other words, how to stay aggressive while also protecting the fund against potentially fatal mistakes. Risk management is one of Adrangi’s bigger worries, and he’s recently begun reorienting around safer long stocks, picking up stakes in companies like Amerco, which owns U-Haul, and Lindsay Corporation, which makes farm irrigation systems. Sometimes, he buys silently. Other times, he tweets and writes blog posts with detailed research supporting his investment thesis, in hopes of getting a faster market response. In January of this year, he wrote, “We’ve gone long $BV @Bazaarvoice, writing Seeking Alpha article tmrw. A bit speculative but attractive relative to comparable cos (i.e., $NOW).” Stock for Bazaarvoice, a marketing-analytics company, shot up 3 percent that day, before the article had even been published.
Kerrisdale’s long-dominated strategy hasn’t been as lucrative as his 2011 shorts—the fund gained just 13 percent through August 1 of this year—but it’s still commanding respect. Even his social-media push has been validated, after Icahn himself used Twitter to tout his Apple investment earlier this summer.
“Now nobody comes into a meeting and thinks, This guy doesn’t know investing,” Adrangi says.
Having conquered research-based short-selling and gotten his feet wet on basic long trading, Adrangi is pushing himself into the choppier waters of activist investing. Other big-name investors have made billions by buying up shares in companies, taking board seats, bullying management into making the changes they want, and reselling their stakes for a profit. It’s a style of investing that’s been used to press for changes at companies like Sears Holdings and Yahoo. And while activist investing can be riskier than simply picking stocks, it’s also a more fun game, with higher stakes, bigger fights, and more opportunity for stardom.
Adrangi is curious. His approach tends to be more circumspect, more Canadian than an Icahn-style fireworks display. But he likes the brash nature of activist investing, the name-calling, the swagger-as-business-strategy approach. And though his professional demeanor is polished, he’s still capable, in person, at least, of talking in Wall Street trader vernacular. People whose ideas he likes are “the man.” People he disagrees with are “delusional” or “full-on retarded.” He’s been rewatching the YouTube video of a splenetic CNBC fight between Icahn and Ackman over nutrition-products company Herbalife. (Icahn called Ackman a “major loser.”) Adrangi took a small stake in Herbalife—choosing Icahn’s long thesis over Ackman’s short—a shrewd move that got him name-checked in a Vanity Fair article about the episode.
He sees that his Twitter account and his blog could be tools for more brash pronouncements. His e-mail list now has 3,000 subscribers; in time, if that number grows, he might have an army of followers ready to be mobilized for profit.
“That’s where we’re trying to get to,” he says. “We’re building credibility in the marketplace, and so, over time, we’re going to get to the point where we have a great investment and are ready to pound the table, and we’ll get that Icahn effect.”
And if becoming an investing legend requires acting like more of a jerk? Well, it’s something Adrangi’s willing to consider. After the closing bell rings and the trading day comes to an end, we head to dinner at a nearby steakhouse, where he tells me that while he still likes the research part of investing—the long nights hunched over 8-Ks and 10-Qs, the digging through earnings-call transcripts, the private investigators in far-flung countries—he’s realizing that the more profitable route, in the long run, might be to turn himself into a brand, go on CNBC, get some gravitas, and start picking fights.
“I was going to write this Morgans Hotel letter a month ago, but I held it back because I didn’t want to hurt people’s feelings.” He takes a sip of his old-fashioned. “Now I wish I’d sent it.”
A few minutes later, after the waiter brings us another round, Adrangi returns to the topic of Morgans.
“The lesson learned is to be more aggressive,” he says. “Why did Burkle release that letter? Because over the course of his career, he’s learned to say, ‘F--- it.’”