It should’ve been the trade of a lifetime. Instead, Carl Icahn’s bet against shopping malls has cost him $742 million — and counting.
The Big Short 2.0
Reporters called it the Big Short 2.0. In 2019, the hedge fund billionaire placed a massive bet that the growth of e-commerce would push malls into bankruptcy.
Icahn bought over $600 million of credit default swaps on mall debt in 2019. These derivatives would pay off handsomely if the malls defaulted.
At first, he saw big gains. Sure he had struck paydirt, Icahn doubled down, increasing his bets to a staggering $2.1 billion by 2020.
Now, those bets are going bad.
Massive Losses
Icahn lost $742 million on his mall bet in 2022, according to The Wall Street Journal, with further losses coming this year. In total, Icahn could lose billions.
Malls have performed poorly since 2019, as he predicted. But the malls he bet against just managed to skirt total default, meaning his trades went sour.
Icahn is not the first hedge fund manager to be burned by betting against retail.
Gabe Plotkin of Melvin Capital and Glen Kacher of Light Street Capital lost billions betting against GameStop. Other funds have lost substantial sums shorting AMC Theaters.
We’ve all predicted the demise of brick and mortar retail for years. And yet, it persists.
A Failure of Risk Management
Icahn’s mistake was not taking some profits off the table in 2019 and 2020, when his trades were making millions. Once I see big gains, I always want to lock in some profits.
When I invest in a startup, for example, I want to sell 10-20% of my shares once I’ve made a return of 50-100x. The expected returns in a swap are lower, but trimming your winners is still the right move.
Another Hole in Icahn’s Sinking Ship
Icahn and his company, Icahn Enterprises (IEP), have lost billions this year. IEP stock is down 65% year to date.
Worse yet, the SEC and DOJ are probing IEP. If they find wrongdoing, I expect the stock to fall much further.
Much of Icahn’s personal net worth is tied up in IEP stock. He even carries substantial loans on his IEP holdings, raising the risk of ruin.
If you’re Icahn, now is not the time for big bets. Now is the time to retreat, regroup, and live to fight another day.
Wrap-Up
The problem with bears like Icahn and Plotkin is they’re swimming against the tide.
America grows almost every year. Businesses produce record profits, and stocks go up.
When you’re betting the opposite way, it’s awfully hard to make money.
“…I have yet to see a time when it made sense to make a long-term bet against America.”
Warren Buffett
What do you think the future holds for Icahn? Leave a comment and let us know!
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More on markets:
Carl Icahn Loses $1.7 Billion in a Day
Pelham Capital: A Hedge Fund in Crisis
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